## 1cogea2019001 — Production Sharing Agreements and Oil Revenues

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### Background and crisis anatomy (pre-2014 to 2017)
- Oil prices:
  - Declined from over $100 (early 2011 to mid-2014) to below $40 by mid-2016.
- Impact on oil revenues and external position:
  - Government oil revenue collapsed from 35 percent of GDP in 2014 to 13½ percent of GDP in 2015.
  - External current account deficit exceeded 40 percent of GDP by early 2016.
- Fiscal and public investment adjustments:
  - Current expenditure increased to 21 percent of GDP in the four years to 2014.
  - Capital expenditure tripled to 31 percent of GDP over the same period.
  - Public investment declined from about 24 percent of GDP in 2015 to 8 percent of GDP by 2017, and collapsed further to 2¼ percent in 2018.
- Growth and social indicators:
  - GDP growth averaged 5 percent over 2004–14; non-oil growth averaged 6½ percent.
  - Poverty fell from 52 percent in 2004 to 31 percent in 2015.
  - Gini index increased to 0.46; vulnerability to poverty remained high at 70 percent.
- Governance and borrowing weaknesses:
  - Nontransparent oil-for-infrastructure barter arrangements, oil pre-purchase loans from oil traders, discounts on government oil sales, and large off-budget spending contributed to unsustainable fiscal and debt policies.

### Production Sharing Agreements (PSAs): changes and quantitative effects
- Fiscal term changes and effects:
  - Introduction in 2015 of more generous fiscal terms reduced the government’s share in production and exacerbated the fall in revenues when oil prices declined.
  - New fiscal terms increased cost recovery ceilings (cost stop) and lowered government shares in excess oil, profit oil, and super profit oil (with super profit oil triggered when international oil prices fall below a field-specific threshold price (TP)).
- Scope and impact:
  - New fiscal terms affected around 60 percent of production by 2017.
  - State’s share of total oil production declined from 55 percent in 2014 to around 37 percent in 2018.
- Counterfactual illustrations from source:
  - If oil prices had remained above the new TP (at around US$/bbl 95), the new terms would have reduced the government share to 50 percent instead of 55 percent in 2015.
  - If the government had retained the old terms, the oil price decline alone (below the old TP of US$/bbl 55) would have reduced the government share to 45 percent in 2015.
- Old Fiscal Terms vs New Fiscal Terms (as presented):
  - Royalties: 12% → 15%
  - Cost Stop: 50% → 50%
  - Threshold Price (US$/bbl): 34 55
  - Excess oil: 50% → 50%
  - Profit oil: 60% → 50%
  - Super profit oil: 70% → 66%
  - (Alternative presentation rows in source)
    - Cost oil (U$/bbl): 45 45
    - Excess oil: 50% 50%
    - Profit oil: 40% 50%
    - Super profit oil: 30% 34

### Fiscal, debt, and financial sector consequences
- Debt dynamics and arrears:
  - Total public debt (including domestic arrears) rose from less than 40 percent of GDP in 2011 to about 118 percent in 2017–18.
  - Domestic arrears reached 16 percent of GDP in 2017.
  - Major drivers: opaque oil trader arrangements (commercial debt), increases in bilateral debt (mostly with China), and domestic arrears accumulation.
- Fiscal balance evolution:
  - Primary deficit adjusted from 24 percent of GDP in 2015 to 5½ percent of GDP in 2017.
  - Primary balance turned into a surplus of almost 9 percent of GDP in 2018.
  - Non-oil primary deficit improved from 35.3 percent of non-oil GDP in 2017 to 28.1 percent of non-oil GDP in 2018.
  - Total public debt declined from 118 to 88 percent of GDP (thanks to fiscal efforts and higher nominal GDP).
- External sector and reserves:
  - Oil prices and production increased by about 25 percent between 2017 and 2018.
  - Exports grew by 45 percent; import growth about 5 percent.
  - Net foreign assets at the central bank increased by over 10 percent; gross imputed reserves cover less than one month of imports.
  - Staff EBA-lite approaches suggest the exchange rate is overvalued by 15–20 percent.
- Banking sector indicators:
  - Broad money growth: 13 percent in 2014 to -12 percent in 2015–17.
  - Commercial bank deposits cumulatively declined by more than CFAF 700 billion since 2014 (around a third).
  - Deposit-to-loan ratio: over 170 percent in 2014 to 90 percent in 2018.
  - NPLs: 4 percent of gross credit in 2014 → 10 percent in 2015–17 → 23 percent in 2018.
  - Private sector credit growth: 26 percent in 2014 → almost 4 percent in 2015–17 → contracted by almost 3 percent in 2018.
  - Banking sector solvency ratio: 25 percent in 2018 (regulatory minimum 7.5 percent); two non-systemic banks in distress.

### Stabilization measures, governance reforms, and 2018–19 developments
- Institutional and governance actions in 2018:
  - Technical and political committees set up for program negotiations with IMF staff.
  - National Assembly approved a prudent 2018 budget.
  - New governance structure for SNPC enacted in late 2017 with enhanced accountability.
  - Fiscal Safeguards Review completed in August 2018 with IMF technical assistance.
  - ANIF organized AML/TF risk assessment methodology workshop.
- Economic outcomes:
  - Overall growth turned positive in 2018 (overall growth 1.6 percent in 2018).
  - Primary balance: from a primary deficit of 24 percent of GDP in 2015 to a primary surplus of almost 9 percent of GDP in 2018.
  - External current account registered the first surplus since 2014.
- Short-term outlook assumptions:
  - Overall growth in 2019 projected to reach 5.4 percent, supported by an expansion in oil production and a projected non-oil growth rate of 1 percent.
  - 2019 pick-up hinges on recovery in public investment, approval of Fund-supported program, and partial repayment of domestic arrears.
  - Medium-term framework uses April 2019 WEO oil price assumptions, with average oil prices about US$/bbl 3½ higher than assumptions used in July 2018.

### 2019 short-term outlook (program assumptions and targets)
- Fiscal and external projections (assuming steadfast program implementation):
  - Overall fiscal balance expected to register a surplus of 7½ percent of GDP in 2019.
  - Non-oil primary deficit projected to adjust to 24.8 percent of non-oil GDP in 2019.
  - Government deposits at the central bank expected to increase from CFAF 64 billion in 2018 to CFAF 213 billion in 2019.
  - Current account balance projected to remain in surplus in 2019 (5.6 percent of GDP).
  - Imputed net foreign assets at the central bank expected to increase to CFAF 319bn.

### Oil sector prospects and projections
- Proven oil reserves: 1.6 billion barrels.
- Production and capacity:
  - Production around 121 million barrels in 2018—an increase of about 20 percent compared with 2017.
  - Production projected to reach 140 million barrels in both 2019 and 2020.
  - New offshore field Moho Nord expected to reach a peak level of 37 million barrels in 2019.
  - Moho Nord and Moho-Bilondo accounted for 45 percent of total oil production in 2018.
  - Banga Kayo and Nene-Banga expected to account for 20 percent of production.
- Medium-term:
  - Over 2020–23, major oil fields expected to contribute around 181,000 barrels/day on average, accounting for 50 percent of production.
  - Absent new developments, oil production projected to decline in 2023 by 16 percent from peak levels.
- Oil production series (Millions of barrels): 85 (2016), 98 (2017), 121 (2018), 140 (2019), 140 (2020), 137 (2021), 125 (2022), 118 (2023).

### Medium-term outlook and fiscal strategy
- Growth and fiscal targets:
  - Non-oil growth projected to recover gradually to about 4 percent in 2022–23.
  - Strong primary surpluses of about 9 percent, on average, over the program period projected to place public debt on a strong downward path.
  - Total public debt expected to decline to about 60 percent by 2023.
  - Non-oil primary deficit expected to decline to about 16 percent of non-oil GDP by 2023.
- Selected program scenario projections (preserved verbatim from Text Table 1):
  - Non-oil real GDP: -3.2 (2017), -6.2 (2018), -5.5 (2019), 1.0 (2020), 2.5 (2021), 3.6 (2022), 4.0 (2023), 4.1 (projection in table).
  - Consumer prices (period average): 3.2 (2017), 0.4 (2018), 1.2 (2019), 1.5 (2020), 1.8 (2021), 2.6 (2022), 2.8 (2023), 3.0 (projection in table).
  - Current account balance (percent of GDP): -63.5 (2017), -5.9 (2018), 6.7 (2019), 5.6 (2020), 5.1 (2021), 1.6 (2022), -1.4 (2023), -1.9 (projection noted).
  - Net foreign assets (percent of GDP): 10.0 (2017), 4.1 (2018), 3.9 (2019), 5.4 (2020), 8.6 (2021), 11.9 (2022), 13.4 (2023), 14.4 (projection noted).
  - External public debt (percent of GDP): 91.4 (2017), 80.0 (2018), 61.3 (2019), 58.1 (2020), 56.6 (2021), 55.5 (2022), 54.2 (2023), 51.5 (projection noted).
  - Non-oil primary balance (percent of non-oil GDP): -51.7 (2017), -35.3 (2018), -28.1 (2019), -24.8 (2020), -21.6 (2021), -20.1 (2022), -16.9 (2023), -15.9 (projection noted).
  - Stock of government deposits at the BEAC (CFAF billion): 2059 (2017), 364 (2018), 213 (2019), 437 (2020), 3766 (2021), 1686 (2022), 721 (2023).
  - Total public debt (percent of GDP, memorandum): 118.6 (2017), 117.5 (2018), 87.8 (2019), 81.7 (2020), 76.6 (2021), 71.6 (2022), 66.8 (2023), 60.7 (projection noted).

### Risks to the outlook and mitigants
- External risks:
  - Volatility in oil prices risks fiscal and external balances.
  - Weaker Euro would increase debt burden and widen current account given difficulty expanding non-oil exports.
  - Need robust contingency mechanisms with commercial creditors; staff recommended contingency mechanisms in agreements with oil traders if oil prices fall below reference levels (MEFP¶33).
- Domestic risks:
  - Difficulty sustaining political support for reforms, large fiscal surpluses, and governance reforms.
  - Delays in clearing domestic arrears could hurt private sector and financial stability.
  - Resurgence of conflict in the Pool area would negatively impact business environment.
- Mitigants:
  - Political willingness at highest levels to support Fund objectives.
  - Prospects of higher oil production and prudent fiscal policies demonstrated in 2018–19.
  - Implementation of structural reforms to improve governance prior to program approval.

### Fiscal consolidation measures and social protection
- Fiscal anchor rationale:
  - Medium-term fiscal anchor based on non-oil primary balance consistent with a Permanent Income Hypothesis (PIH) rule to achieve a moderate level of debt distress by 2022–23 and place public debt toward 60 percent of GDP by 2023.
  - PIH assumptions (Box 3): existing reserves ~1.9bn barrels (expected new discoveries ~0.3bn), medium-term oil price ~$60, about 45 percent of revenues to government, time horizon ~15 years, discount factor and rate of return on financial assets ~5 percent.
- Composition of fiscal adjustment (Text Table 2, percent of non-oil GDP, 2018 vs 2022 Prel.):
  - Total revenue and grants: 74.2 (2018) to 71.2 (2022) -3.0.
  - Oil revenue: 50.6 (2018) to 35.9 (2022) -14.7.
  - Non-oil revenue: 23.4 (2018) to 34.2 (2022) +10.9.
  - Expenditure and net lending: 57.4 (2018) to 54.8 (2022) -2.7.
  - Current expenditure: 51.9 (2018) to 41.2 (2022) -10.7.
  - Capital expenditure: 5.5 (2018) to 13.5 (2022) +8.0.
  - Non-oil primary balance: -28.1 (2018) to -16.9 (2022) +11.1.
- Key revenue measures to raise non-oil revenues (Text Table 4 totals and top items):
  - Total estimated impact: 154.2 CFA bn; 5.9 percent of non-oil GDP.
  - I. Strict implementation of current regulations and System Adjustment: 99.0 CFA bn; 3.8 percent of non-oil GDP.
    - I.1 Elimination of the reduced rate of VAT and reduction of the threshold for VAT liability (from 100 to 60 million FCFA): 82.1 CFA bn; 3.2 percent of non-oil GDP; 53.3 percent of total.
    - I.2 Implementation of provisions on excise duties and the tax on beverages and tobacco: 7.7 CFA bn; 0.3 percent of non-oil GDP; 5.0 percent of total.
    - I.3 Implementation of the 2 percent rate of the TSS (Tax Special Societe): 9.2 CFA bn; 0.4 percent of non-oil GDP; 6.0 percent of total.
  - II. Strengthening tax and customs functions: 53.4 CFA bn; 2.1 percent of non-oil GDP; 34.6 percent of total.
    - II.1 Strengthening tax compliance: 16.2 CFA bn; 0.6 percent of non-oil GDP; 10.5 percent of total.
    - II.2 Tax Arrears collection (at least 60 percent): 19.2 CFA bn; 0.7 percent of non-oil GDP; 12.5 percent of total.
    - II.3 Enforce audit rules and strengthen customs evaluation control: 18.0 CFA bn; 0.7 percent of non-oil GDP; 11.7 percent of total.
  - III. Legislative measures: 1.8 CFA bn; 0.1 percent of non-oil GDP; 1.2 percent of total.
    - III.1 Establishment of the TV fees: 0.6 CFA bn; 0.0 percent of non-oil GDP; 0.4 percent of total.
    - III.2 Establishment of a 1 percent fee on electronic transactions: 1.2 CFA bn; 0.0 percent of non-oil GDP; 0.8 percent of total.
- Budget prudence and social protection:
  - Staff advised prudence on non-oil revenue projections in the 2019 Budget and stressed rigorous implementation (MEFP ¶28–30).
  - Authorities reduced transfers to the oil sector by CFAF 100bn, reallocating CFA 50 billion to social spending.
  - 2019 budget envisages CFA 306 billion (4.7 percent of GDP) in social spending, including CFA 50 billion from oil-transfer savings to Lisungi cash transfers and other priority social programs.
  - Lisungi project to invest CFA 199 billion over 4 years to expand coverage to 192,065 households; initial expansion structural benchmark for end-December 2019.
  - Authorities prioritize early repayment of social sector arrears (especially pensions).
- Contingency: If revenue mobilization shortfalls occur, public investment likely to be adjusted (projected expansion by about 5¾ percent of non-oil GDP).

### Domestic arrears: stock, audit, and amortization
- Stock at end-2018: 986 billion CFAF (15 percent of 2018 GDP).
- Composition at end-2018:
  - Social arrears (pension contributions): about CFAF 223bn.
  - Arrears to government suppliers accumulated over 2014–16: about CFAF 528bn.
- Independent audit (Ernst and Young, finalized April 2019):
  - About 3/4 of the 2014–16 stock rejected due to irregularities, leaving audited commercial arrears from 2014–16 equivalent of CFAF 138bn.
- New arrears accumulated over 2017–18 increased the stock by CFAF 626bn:
  - CFAF 506bn to government suppliers.
  - CFAF 120 bn to public administration entities (floating checks unpaid for more than 90 days).
- New audit to cover 2017–18 arrears (structural benchmark for end-October 2019).
- Repayment strategy:
  - Clear social arrears over 3 years, starting in 2019.
  - Clear the rest of arrears over five to seven years (MEFP ¶33).
- Urgency and risk:
  - Large share of new arrears may be rejected due to accounting errors/irregularities; strengthening PFM controls is imperative, especially for ministry of infrastructure and procurement contracting.
  - Example: authorities rejected gross claims related to public works for CFA 415bn (6.4 percent of 2018 GDP) after administrative review.

### Debt restructuring, public debt, and financing gap
- Total public debt in 2018: estimated at 87¾ percent of GDP.
  - External debt representing 61¾ percent of GDP.
  - Large external exposures: China 21.4 percent of GDP; oil traders 16.4 percent of GDP.
- External payment arrears:
  - End-2017: CFAF 453 billion (US$817 million).
  - End-2018: CFAF 520 billion (US$908 million).
- China debt restructuring (April 2019) terms (MEFP ¶33):
  - Payment of 1/3 of the stock over three years.
  - Rescheduling of remainder 67 percent through a 15-year extension and average interest rate ~1.7 percent.
  - Effects: reduce debt service during program period by about $370 million; cut debt service immediately after the program (2023–28) by about half; ensure debt service below 0.5 percent of GDP per year for 2029–45.
- Financing gap for 2019–22: about CFAF 1084 billion (about $1.9 billion) after fiscal adjustment and China restructuring — a reduction of about 2/5 compared with July 2018 assumptions.
- Exceptional financing from debt restructuring expected to cover about 42 percent of the financing gap for 2019–22.
- Authorities project restructuring to bring PV of total public debt below 35 percent by 2025.

### Restructuring approach and conditions
- Strategy highlights:
  - External commercial creditors: nominal haircut.
  - Domestic debt (including domestic arrears but excluding BEAC advances, regional bond and T-bills): nominal haircut and gradual repayment over medium term; domestic restructuring contingent on new audit results.
  - Other official external creditors: do not participate; their post-HIPC external arrears to be cleared before the first program review.
  - Goal: complete restructuring of external commercial debt and domestic debt by first program review (MEFP ¶33).
- Contingent liabilities and debt management reforms:
  - Contingent liabilities (e.g., Commisimpex debt and rejected domestic arrears) threaten sustainability and are addressed up front.
  - Projections include a buffer in government deposits to pay debt service on contingent claims if materialized.
  - IMF TA recommendations to strengthen debt management: bolster NPDC coordination; comply with CEMAC guidelines; increase training for debt staff.
  - Institutional steps: March 2018 AFC TA mission updated NPDC legal texts; manual adopted by NPDC in May 2019 obliges stakeholders to transmit debt information to Caisse Congolaise de l’Amortissement and limits off-framework borrowing.
  - Program establishes zero limit on guaranteeing debt with future natural resource deliveries, prohibits pre-financing and oil-for-infrastructure barter arrangements, and limits borrowing to concessional loans.
- Recommendation: timely publication of consolidated government debt statistics including SOE assets and liabilities.

### Structural reforms: governance, transparency, and anti-corruption
- Prior actions and measures taken:
  - Diagnostic report on governance and corruption published June 2018 (prior action).
  - Reports submitted to Parliament on SNPC pre-financing arrangements, large investment projects 2014–17, and special oil-backed contracts.
  - Steps to improve oil sector governance: replacement of SNPC senior management; law requiring annual external audit of SNPC accounts; SNPC under Ministry of Hydrocarbons with written contract; resumption of KPMG reconciliation reports publication.
  - May 2019: law to establish oversight committee for Transparency Law; committee of 11 members includes 6 from CSOs and press; implementing decree proposed end-September 2019 structural benchmark.
  - February 2019: law creating independent anti-corruption commission with investigative powers; implementing decree proposed end-September 2019; amendment to ensure full UNCAC compliance proposed end-March 2020.
  - February 2019: law requiring senior officials to disclose assets; authorities to work with staff to address shortcomings.
- Remaining priorities and recommendations:
  - Strengthen PFM controls to prevent invalid claims.
  - Improve SOE oversight, including SNPC; consider explicit borrowing framework for SOEs at first review.
  - Undertake a Fiscal Transparency Evaluation with Fund assistance.

### Public financial management (PFM) and public investment framework
- Planned measures:
  - Public Expenditure Tracking Survey (PETS) of 2014–18 projects with World Bank to identify investment process losses.
  - Public Investment Management Assessment (PIMA) to strengthen PIM framework.
  - Develop a prioritized pipeline of projects with feasibility studies and cost-benefit analysis (AfDB assistance).
  - End supplier-lender procurement practice by dissociating loan negotiations from tender awards to ensure competitive tendering.
- External control strengthening:
  - At first review, staff will urge adoption of law organizing functions of the supreme audit institution (CCDB) and implementing regulations.
- Medium-term alignment:
  - Measures aligned with 2014 PEFA, 2015 PEMFAR, IMF TA reports, and authorities’ medium-term governance strategy (RGC 2018).
  - Authorities to request FAD TA on Expenditure Assessment Tool.

### Financial sector stability, NPLs, and bank resolution
- Financial stability measures:
  - Strategy for orderly restructuring or resolution of weakest banks in consultation with COBAC (MEFP ¶35).
  - Insolvent banks without investor interest to be liquidated without public resource injection; insured depositors protected by deposit insurance scheme (FOGADAC).
  - Timely resolution by end-September 2019 important to support regional supervision and governance.
- NPL reduction and recapitalization:
  - Staff supports reducing NPLs via clearance of domestic arrears after restructuring and sound program implementation.
  - Annex IV estimates recapitalization needs of insolvent banks in case of large haircuts could reach 1.6 percent of GDP.
- Financial sector development:
  - Develop a financial sector development strategy with regional authorities and partners.
  - Accelerate credit and collateral registries, strengthen legal capacity for financial litigation, encourage microfinance and mobile banking.

### Improving data, statistics, and transparency
- Transparency and data publication:
  - Establish government website with reliable public access (critical need, MEFP ¶40).
  - Authorities published new data series: monthly inflation rate; quarterly government finance statistics projections; quarterly outturns on domestic and external debt stock and debt service.
  - Staff urged adoption and implementation of emergency plan to improve statistical systems and strengthen INS mandate.
  - World Bank PSTAT support and IMF Statistics Department assistance sought.

### Program modality, ECF request, and financing assurances
- ECF request:
  - Authorities requested a 36-month arrangement under the ECF, access set at SDR 324 million (200 percent of quota).
- Balance of payments and financing:
  - Oil price shock contributed to a balance of payments need of US$1.91 billion over 2019–22.
  - ECF access covers 24 percent of projected external financing gap over 2019–22 and about one-third of new external financing.
  - Another 48 percent of gap to be filled by World Bank, AfDB, and France; remaining 28 percent by debt restructuring.
  - For first year, firm commitments of full program financing are in place; good prospects for full financing for remainder of program.
- Capacity to repay:
  - Congo has implemented eight Fund-supported programs.
  - SDR 2.42 million outstanding as of end-May 2019.
  - Debt service to IMF as share of exports peaks in 2026 at 4.9 percent before declining to 0.1 percent in 2031 (Table 10).

### PFM, transparency, and implementation benchmarks (selected structural benchmarks)
- Selected benchmarks and targets:
  - Complete new audit of domestic debt (including 2017–18 exercises) — Target: October 2019.
  - Adopt privatization strategy — Target: End-September 2019.
  - Approve revised domestic fuel price structure with higher taxes and automatic adjustment — Target: End-October 2019.
  - Scale up Lisungi cash transfer as described — Target: End-December 2019.
  - Adopt implementing decrees of anti-corruption and transparency laws — Target: End-September 2019.
  - Submit amendment to anti-corruption law for UNCAC compliance — Target: End-March 2020.
  - Certify transmission to BEAC of laws/contracts granting FX exemptions to oil operators — Target: End-September 2019.

### Annex highlights — fiscal aggregates and selected tables (preserved verbatim figures)
- Fiscal aggregates (percent of GDP, 2016–23):
  - Total revenue and grants: 34.1, 27.9, 34.9, 29.2, 31.4, 32.1, 32.7, 34.2, 34.7
  - Oil revenue: 15.2, 13.1, 20.9, 19.9, 19.2, 18.1, 17.8, 17.2, 16.4
  - Non-oil revenue: 18.0, 14.2, 13.5, 9.2, 11.7, 13.6, 14.5, 16.4, 17.7
  - Capital expenditure: 19.4, 7.9, 4.6, 2.2, 4.5, 5.4, 6.0, 6.5, 6.8
- Balances and fiscal targets (percent of GDP):
  - Non-oil primary balance: -32.6, -18.3, -11.5, -11.0, -9.9, -8.9, -8.8, -8.1, -8.2
  - Primary balance: -17.4, -5.2, 9.5, 8.9, 9.3, 9.2, 9.0, 9.1, 8.3
  - Overall balance, payment order basis (including grants): -20.1, -7.4, 7.1, 6.6, 7.5, 7.6, 7.6, 7.9, 7.3
- Financing and deposits (percent of GDP; levels where given):
  - Financing gap (- = surplus): 0.0, 0.0, 8.9, 0.0, 5.5, 6.2, 3.7, 1.0, -0.5
  - Stock of government deposits (percent of GDP): 4.4, 1.8, 6.0, 1.0, 3.3, 6.6, 10.0, 10.7, 11.2
  - Stock of domestic arrears (percent of GDP): ... , 18.9, ... , 15.2, 12.4, 9.1, 5.6, 3.1, 0.5
  - GDP at current market prices (CFAF billion): 4,616; 5,189; 5,760.0; 6,476; 6,529; 6,578; 6,611; 6,432; 6,449

### Annex I — Restructuring Debt to Achieve Sustainability (selected findings)
- Objective: bring debt indicators below policy-dependent thresholds by 2023 and restore sustainability.
- Key solvency/liquidity findings:
  - Debt service on existing debt will average $1.5 billion (about 12.5 percent of GDP) between 2019 and 2022.
  - Baseline PV of external debt-to-GDP remains above its threshold between 2019 and 2030 without restructuring.
  - Authorities’ proposed restructuring brings PV of external debt below 30 percent of GDP by 2023 and PV of total public debt below 35 percent by 2025.
- Domestic debt considerations:
  - Eligible domestic debt for restructuring excludes BEAC advances and domestic bonds.
  - Domestic restructuring terms could be more favorable than external debt terms to limit adverse growth and banking-sector effects.
- Contingent liabilities and escrow buffers (Billions of CFA francs):
  - Escrow account amounts: 2019: 539; 2020: 440; 2021: 454; 2022: 385
  - Breakdown (external creditors / domestic creditors / restructured contingent liabilities) preserved as presented.

### Annex III — Fiscal multipliers and non-oil growth sources (selected results)
- Fiscal multipliers:
  - Statistical average measure (2004–18): 0.2 overall; increased to 0.4 after 2014.
  - IMF BA assigns Congo to low bucket (0.1 to 0.3); scaled multiplier between 0.15 and 0.45.
  - Regression and IV estimates: OLS range (0.13, 0.20); IV range 0.19–0.28.
  - Selected fiscal multiplier for scenario analysis: 0.32 for recessions and 0.23 for expansions.
- Projected impact:
  - Expected fiscal consolidation (adjustment from 5 to 2 percent of non-oil GDP between 2018 and 2019) plus rebound in public investment estimated to lead to recovery in non-oil growth by 1 percent for 2019.
- Sources of non-oil growth:
  - Historical growth driven by factor accumulation; TFP contribution negative overall but rose to 0.8 percent during 2004–14 and turned negative in 2015–18.
  - Infrastructure sectors accounted for one quarter of non-oil growth; agriculture grew 3.7 percent per annum (1990–2018) and accounted for 12 percent of non-oil GDP.
- Policy implications:
  - Shift growth drivers to TFP via governance, public investment efficiency, human capital, and business climate reforms to offset consolidation effects.

### Sovereign-bank linkages, stress tests, and policy recommendations (selected)
- Banking sector exposures and vulnerabilities:
  - Banking assets: CFAF 1928 billion (USD 3.47 billion or 30 percent of GDP) as of December 2018.
  - Banks’ sovereign holdings (end-2018): CFAF 237.6 billion (12 percent of banking sector assets).
  - Government securities held: CFAF 91.3 billion (4.7 percent of assets).
  - Banks’ loans in arrears: increased from CFAF 33 billion in September 2014 to CFAF 287 billion at end-2018.
- Stress-test indicative results:
  - Under moderate assumptions (20 percent write-off on non-provisioned overdue loans; 20 percent on non-provisioned immobilized claims; 75 percent on provisioned NPLs; no bank profits; BEAC policy rate +150 bps), solvency ratio falls from 24.9 percent to 19 percent (above regulatory requirement of 9.5 percent).
  - Severe scenario (50 percent write-off on sovereign debt held by banks; 75 percent write-off on various claims; complete NPL write-off) would reduce solvency ratio to 6 percent and render capital of seven banks insolvent; recapitalization needs could reach 1.6 percent of GDP.
- Policy recommendations to safeguard stability during restructuring:
  - Explicitly account for financial stability in restructuring design.
  - Exclude sovereign debt held by financial institutions and short-maturity instruments (T-bills) where appropriate.
  - Devise credible, transparent arrears clearance plan prioritizing social arrears to enable firms to repay banks.
  - Ensure BEAC can provide liquidity support; consider temporary expansion of eligible collateral if sovereign risk rises.
  - Strengthen COBAC supervision, provisioning rules, and resolution frameworks; quickly resolve non-systemic insolvent banks.

### Staff appraisal — governance and fiscal outlook (summary)
- Recent actions commendable; 2018 turnaround "particularly impressive" with public debt decline by 30 percent of GDP (text note).
- Policy priorities:
  - Pursue fiscal consolidation and boost non-oil revenues to protect public investment and social programs.
  - Protect vulnerable groups via effective execution of higher social spending.
  - Operationalize recent laws (asset declarations, anti-corruption commission) and ensure alignment with international best practices.
  - Pursue good-faith commercial debt restructuring, especially with oil traders, prior to the first review.
  - Refrain from contracting new non-concessional loans before restoration of public finance sustainability.

_Italic: Source — 1cogea2019001 (Republic of Congo; IMF staff report excerpt)._

### 1. Production Sharing Agreements and Oil Revenues ____________________________________________ 7

### 1. Production Sharing Agreements and Oil Revenues

### Background and anatomy of the crisis (pre-2014 to 2017)
- The Republic of Congo experienced a profound economic crisis triggered by the sharp decline in oil prices since mid-2014.
- Oil prices:
  - Declined from over $100 (early 2011 to mid-2014) to below $40 by mid-2016.
- Impact on oil revenues and external position:
  - Government oil revenue collapsed from 35 percent of GDP in 2014 to 13½ percent of GDP in 2015.
  - External current account deficit exceeded 40 percent of GDP by early 2016.
- Fiscal and public investment adjustments:
  - Current expenditure increased to 21 percent of GDP in the four years to 2014.
  - Capital expenditure tripled to 31 percent of GDP over the same period.
  - Public investment declined from about 24 percent of GDP in 2015 to 8 percent of GDP by 2017, and collapsed further to 2¼ percent in 2018.
- Growth and social indicators:
  - GDP growth averaged 5 percent over 2004–14; non-oil growth averaged 6½ percent.
  - Poverty fell from 52 percent in 2004 to 31 percent in 2015.
  - Gini index increased to 0.46; vulnerability to poverty remained high at 70 percent.
- Governance and borrowing weaknesses:
  - Nontransparent oil-for-infrastructure barter arrangements, oil pre-purchase loans from oil traders, discounts on government oil sales, and large off-budget spending.
  - These practices contributed to unsustainable fiscal and debt policies.

### Production Sharing Agreements (Box 1): specific changes and effects
- Description of how new fiscal terms affected government oil receipts:
  - The introduction in 2015 of more generous fiscal terms reduced the government’s share in production and exacerbated the fall in revenues when oil prices declined.
  - The new fiscal terms increased the ceilings for costs recovered by oil companies (cost stop) and lowered the government’s shares in:
    - excess oil (the difference between actual costs and cost stop),
    - profit oil (production after royalties and cost oil), and
    - super profit oil (which arise when international oil prices fall below a threshold price (TP) pre-set for each oil field).
- Scope and quantitative effects:
  - The new fiscal terms affected around 60 percent of production by 2017.
  - The state’s share of total oil production declined from 55 percent in 2014 to around 37 percent in 2018, contributing to the fall in oil fiscal receipts.
- Counterfactual illustrations provided in the source:
  - If oil prices had remained above the new TP (at around US$/bbl 95), the application of the new terms would have reduced the government share to 50 percent instead of 55 percent in 2015.
  - If the government had retained the old fiscal terms, the oil price decline alone (below the old TP of US$/bbl 55) would have reduced the government share to 45 percent in 2015.
- Table of Old Fiscal Terms vs New Fiscal Terms (as presented):
  - Royalties: 12% → 15%
  - Cost Stop: 50% → 50%
  - Threshold Price (US$/bbl): 34 55
  - Excess oil: 50% → 50%
  - Profit oil: 60% → 50%
  - Super profit oil: 70% → 66%
  - (Alternative presentation rows in source)
    - Cost oil (U$/bbl): 45 45
    - Excess oil: 50% 50%
    - Profit oil: 40% 50%
    - Super profit oil: 30% 34%

### Fiscal, debt, and financial sector consequences
- Debt dynamics:
  - Total public debt (including domestic arrears) rose from less than 40 percent of GDP in 2011 to about 118 percent in 2017–18.
  - Domestic arrears reached 16 percent of GDP in 2017.
  - Major drivers of the increase in debt: expansion in commercial debt linked to opaque oil trader arrangements; increases in bilateral debt (mostly with China); large accumulation of domestic arrears.
- Fiscal balance evolution:
  - Primary deficit adjusted from 24 percent of GDP in 2015 to 5½ percent of GDP in 2017.
  - Primary balance turned into a surplus of almost 9 percent of GDP in 2018.
  - Non-oil primary deficit improved from 35.3 percent of non-oil GDP in 2017 to 28.1 percent of non-oil GDP in 2018 (lowest level since 2004).
  - Thanks to fiscal efforts and higher nominal GDP, total public debt declined from 118 to 88 percent of GDP.
- External sector and reserves:
  - Oil prices and production increased by about 25 percent between 2017 and 2018.
  - Exports grew by 45 percent; import growth about 5 percent.
  - Net foreign assets at the central bank increased by over 10 percent; gross imputed reserves stabilized but remain at very modest levels, covering less than one month of imports.
  - Fund EBA-lite and tailored approaches suggest the exchange rate is overvalued by 15–20 percent.
- Banking sector indicators:
  - Broad money growth declined from 13 percent in 2014 to -12 percent in 2015–17.
  - Commercial bank deposits cumulatively declined by more than CFAF 700 billion since 2014 (around a third).
  - Deposit-to-loan ratio declined from over 170 percent in 2014 to 90 percent in 2018.
  - NPLs rose from 4 percent of gross credit in 2014 to 10 percent in 2015–17 and to 23 percent in 2018.
  - Private sector credit growth slowed from 26 percent in 2014 to almost 4 percent in 2015–17 and contracted by almost 3 percent in 2018.
  - Overall banking sector solvency ratio was 25 percent in 2018 (regulatory minimum 7.5 percent); two non-systemic banks are in distress.

### Stabilization measures, governance reforms, and 2018–19 developments
- Policy and institutional actions in 2018:
  - Authorities set up a technical committee and a political committee to conduct program negotiations with Fund staff.
  - National Assembly approved a prudent budget for 2018.
  - New governance structure for the SNPC enacted in late 2017 with enhanced accountability.
  - Fiscal Safeguards Review completed in August 2018 with IMF technical assistance.
  - ANIF (Financial Intelligence Unit) organized a workshop on money laundering/terrorist financing risk assessment methodology.
- Economic outcomes in 2018 and early 2019:
  - Overall growth turned positive in 2018.
  - Primary balance: from a primary deficit of 24 percent of GDP in 2015 to a primary surplus of almost 9 percent of GDP in 2018.
  - Non-oil primary deficit improved to 28.1 percent of non-oil GDP in 2018.
  - Total public debt declined from 118 to 88 percent of GDP.
  - External current account registered the first surplus since 2014.
- Short-term outlook and assumptions:
  - Overall growth in 2019 is projected to reach 5.4 percent, supported by an expansion in oil production and a projected non-oil growth rate of 1 percent.
  - The projected pick-up in 2019 hinges on a recovery in public investment in 2019 and confidence effects from approval of the Fund-supported program and partial repayment of domestic arrears.
  - Medium-term framework uses April 2019 WEO oil price assumptions, with average oil prices about US$/bbl 3½ higher than the assumptions used in July 2018.

*Source: 1cogea2019001 - 1. Production Sharing Agreements and Oil Revenues (PDF).*

### 12.      The fiscal and external positions, which strengthened substantially in 2018, are

### 12.      The fiscal and external positions, which strengthened substantially in 2018, are

### 2019 Short-term Outlook
- Assuming a steadfast implementation of program commitments:
  - Overall fiscal balance is expected to register a surplus of 7½ percent of GDP in 2019.
  - Non-oil primary deficit will adjust further to 24.8 percent of non-oil GDP in 2019.
  - Government deposits at the central bank expected to increase from CFAF 64 billion in 2018 to CFAF 213 billion in 2019.
  - Current account balance projected to remain in surplus in 2019 (5.6 percent of GDP).
  - Congo’s imputed net foreign assets at the central bank expected to increase to CFAF 319bn.

### Oil Sector Prospects (Box 2)
- Proven oil reserves estimated at 1.6 billion barrels.
- Production and capacity:
  - Production was around 121 million barrels in 2018—an increase of about 20 percent compared with 2017.
  - Production projected to boost output levels to 140 million barrels in both 2019 and 2020.
  - New offshore field Moho Nord expected to reach a peak level of 37 million barrels in 2019.
  - Production from Moho Nord and Moho-Bilondo accounted for 45 percent of total oil production in 2018.
  - Banga Kayo and Nene-Banga fields expected to account for 20 percent of production.
- Forecast updates:
  - Oil companies consulted account for about 75 percent of production.
  - Production levels in 2019Q1 suggest revised production estimates are attainable.
- Medium-term:
  - Over 2020–23, major oil fields expected to contribute around 181,000 barrels/day on average, accounting for 50 percent of production.
  - Second phase of exploration licensing offering up to 18 blocks; tender results planned for announcement by July 2019.
  - Absent new developments, oil production projected to decline in 2023 by 16 percent from peak levels.

### Medium-term Outlook and Fiscal Strategy
- Non-oil growth projected to gradually recover and reach about 4 percent in 2022–23.
- Strong primary surpluses of about 9 percent, on average, over the program period projected to place public debt on a strong downward path.
- Total public debt expected to decline to about 60 percent by 2023.
- Non-oil primary deficit expected to decline to about 16 percent of non-oil GDP by 2023.
- Program scenario highlights (selected figures from Text Table 1 and projections):
  - Non-oil real GDP: -3.2 (2017), -6.2 (2018), -5.5 (2019), 1.0 (2020), 2.5 (2021), 3.6 (2022), 4.0 (2023), 4.1 (projection in table).
  - Consumer prices (period average): 3.2 (2017), 0.4 (2018), 1.2 (2019), 1.5 (2020), 1.8 (2021), 2.6 (2022), 2.8 (2023), 3.0 (projection in table).
  - Current account balance (percent of GDP): -63.5 (2017), -5.9 (2018), 6.7 (2019), 5.6 (2020), 5.1 (2021), 1.6 (2022), -1.4 (2023), -1.9 (projection noted).
  - Net foreign assets (percent of GDP): 10.0 (2017), 4.1 (2018), 3.9 (2019), 5.4 (2020), 8.6 (2021), 11.9 (2022), 13.4 (2023), 14.4 (projection noted).
  - External public debt (percent of GDP): 91.4 (2017), 80.0 (2018), 61.3 (2019), 58.1 (2020), 56.6 (2021), 55.5 (2022), 54.2 (2023), 51.5 (projection noted).
  - Non-oil primary balance (percent of non-oil GDP): -51.7 (2017), -35.3 (2018), -28.1 (2019), -24.8 (2020), -21.6 (2021), -20.1 (2022), -16.9 (2023), -15.9 (projection noted).
  - Stock of government deposits at the BEAC (CFAF billion): 2059 (2017), 364 (2018), 213 (2019), 437 (2020), 3766 (2021), 1686 (2022), 721 (2023) — as presented in the table.
  - Total public debt (percent of GDP, memorandum): 118.6 (2017), 117.5 (2018), 87.8 (2019), 81.7 (2020), 76.6 (2021), 71.6 (2022), 66.8 (2023), 60.7 (projection noted).
  - Oil production (Millions of barrels): 85 (2016), 98 (2017), 121 (2018), 140 (2019), 140 (2020), 137 (2021), 125 (2022), 118 (2023).

### Risks to the Outlook
- External risks:
  - Volatility in oil prices would put pressure on fiscal and external balances.
  - A weaker Euro would increase the debt burden and widen the current account deficit given difficulties to expand non-oil exports.
  - Need for debt restructuring with commercial creditors to be robust to commodity sector price volatility; staff recommended contingency mechanisms in agreements with oil traders if oil prices fall below reference levels (MEFP¶33).
- Domestic risks:
  - Difficulty in sustaining political support for the reform program, including sustaining large fiscal surpluses and implementing governance reforms.
  - Possible delays in clearing domestic arrears could hurt the private sector and financial sector stability.
  - Resurgence of conflict in the Pool area would negatively impact the business environment.
- Mitigants:
  - Willingness of the highest political authorities to support Fund objectives.
  - Prospects of higher oil production levels and prudent fiscal policies demonstrated in 2018 and early 2019.
  - Implementation of a large package of structural reforms, including measures to improve governance prior to program approval.

### Fiscal Consolidation Measures and Social Protection
- Fiscal anchor and rationale:
  - Medium-term fiscal anchor based on non-oil primary balance consistent with a Permanent Income Hypothesis (PIH) rule to achieve a moderate level of debt distress by 2022–23 and place public debt toward 60 percent of GDP by 2023.
  - PIH-based calculation assumptions (as presented in Box 3): (i) existing reserves of about 1.9bn barrels (with expected new discoveries of about 0.3bn), (ii) a medium-term oil price of about $60, (iii) about 45 percent of revenues accruing to the government; (iv) a time horizon of about 15 years; and (v) both a discount factor and rate of return on financial assets of about 5 percent.
- Composition of fiscal adjustment (Text Table 2, percent of non-oil GDP, 2018 vs 2022 Prel.):
  - Total revenue and grants: 74.2 (2018) to 71.2 (2022) -3.0.
  - Oil revenue: 50.6 (2018) to 35.9 (2022) -14.7.
  - Non-oil revenue: 23.4 (2018) to 34.2 (2022) +10.9.
  - Expenditure and net lending: 57.4 (2018) to 54.8 (2022) -2.7.
  - Current expenditure: 51.9 (2018) to 41.2 (2022) -10.7.
  - Capital expenditure: 5.5 (2018) to 13.5 (2022) +8.0.
  - Non-oil primary balance: -28.1 (2018) to -16.9 (2022) +11.1.
- Key policy measures to raise non-oil revenues (Text Table 4; estimated yield in CFA bn and percent of non-oil GDP):
  - Total estimated impact: 154.2 CFA bn; 5.9 percent of non-oil GDP.
  - I. Strict implementation of current regulations and System Adjustment: 99.0 CFA bn; 3.8 percent of non-oil GDP.
    - I.1 Elimination of the reduced rate of VAT and reduction of the threshold for VAT liability (from 100 to 60 million FCFA): 82.1 CFA bn; 3.2 percent of non-oil GDP; 53.3 percent of total.
    - I.2 Implementation of provisions on excise duties and the tax on beverages and tobacco: 7.7 CFA bn; 0.3 percent of non-oil GDP; 5.0 percent of total.
    - I.3 Implementation of the 2 percent rate of the TSS (Tax Special Societe): 9.2 CFA bn; 0.4 percent of non-oil GDP; 6.0 percent of total.
  - II. Strengthening tax and customs functions: 53.4 CFA bn; 2.1 percent of non-oil GDP; 34.6 percent of total.
    - II.1 Strengthening tax compliance: 16.2 CFA bn; 0.6 percent of non-oil GDP; 10.5 percent of total.
    - II.2 Tax Arrears collection (at least 60 percent): 19.2 CFA bn; 0.7 percent of non-oil GDP; 12.5 percent of total.
    - II.3 Enforce audit rules and strengthen customs evaluation control: 18.0 CFA bn; 0.7 percent of non-oil GDP; 11.7 percent of total.
  - III. Legislative measures: 1.8 CFA bn; 0.1 percent of non-oil GDP; 1.2 percent of total.
    - III.1 Establishment of the TV fees: 0.6 CFA bn; 0.0 percent of non-oil GDP; 0.4 percent of total.
    - III.2 Establishment of a 1 percent fee on electronic transactions: 1.2 CFA bn; 0.0 percent of non-oil GDP; 0.8 percent of total.
- Budget prudence and implementation:
  - Staff advised prudence on non-oil revenue projections in the 2019 Budget (Text Table 3) and stressed rigorous implementation of the 2019 Budget (MEFP ¶28–30).
  - Authorities reduced transfers to the oil sector by CFAF 100bn, reallocating CFA 50 billion of savings from oil transfers to social spending.
- Social protection and mitigation measures:
  - Budget envisages CFA 306 billion (4.7 percent of GDP) in social spending, including measures to mitigate the impact of adjustment on vulnerable groups.
  - CFA 50 billion associated with savings on oil transfers will be transferred to social spending and distributed between the Lisungi cash transfer system and other priority social programs.
  - Over the next 4 years, the Lisungi project will invest CFA 199 billion to expand coverage to 192,065 households, with an initial expansion effort in 2019 (structural benchmark for end-December 2019).
  - Authorities will prioritize early repayment of social sector arrears (especially pensions).
- Implementation contingencies:
  - If there are delays or shortfalls in revenue mobilization measures, authorities would likely need to adjust public investment, which is projected to expand by about 5¾ percent of non-oil GDP.

*Source: IMF staff estimates and projections; Congolese authorities’ data, as presented in the content unit.*

### 22.        The strategy also envisages plans to clear a large stock of domestic arrears. At end-

### 1cogea2019001 - 22.        The strategy also envisages plans to clear a large stock of domestic arrears. At end-

### Domestic arrears: stock, audit, and amortization
- Estimated stock at end-2018: 986 billion CFAF (15 percent of 2018 GDP).
- Composition at end-2018:
  - Social arrears (pension contributions): about CFAF 223bn.
  - Arrears to government suppliers accumulated over 2014–16: about CFAF 528bn.
- Independent audit (Ernst and Young, finalized April 2019):
  - About 3/4 of the 2014–16 stock rejected due to irregularities, leaving audited commercial arrears from 2014–16 equivalent of CFAF 138bn.
- New arrears accumulated over 2017–18 increased the stock by CFAF 626bn:
  - CFAF 506bn to government suppliers.
  - CFAF 120 bn to public administration entities (floating checks unpaid for more than 90 days).
- A new audit will cover the 2017–18 arrears (structural benchmark for end-October 2019).
- Government strategy for repayment:
  - Clear social arrears over 3 years, starting in 2019.
  - Clear the rest of the arrears over five to seven years (MEFP ¶33).
- Text Table 5 (selected figures from amortization schedule and stocks):
  - Audited arrears (2019–2025 row values): 36 15.6 10 2 10 2 10 2 28 2800
  - Commercial: 138 2.1 28 2 8 28 2 8 28 00
  - Social and pensions: 223 3.4 74 74 74 70000
  - Unaudited arrears: 626 9.7 74 107 128 144 138 1817
  - Government contractors/Suppliers: 506 7.8 57 90 110 126 1211 0
  - Budgetary float: 120 1.9 17 17 17 17 17 17
  - Annual repayment flows: ......176 209 229 171 166 1817
  - Total stock of arrears (selected year values): 986 15.2 810 137 220 135 170
  - Memo: Rejected claims: 415 6.4

### Causes, risks, and urgency
- Causes: delays in fiscal consolidation prior to 2018, severe cash constraints, and weak PFM practices.
- Risk: substantial part of new arrears may be rejected due to accounting errors or irregularities; PFM controls need strengthening, especially for the ministry of infrastructure and procurement contracting before securing resources.
- Example: authorities rejected gross claims related to public works for CFA 415bn or 6.4 percent of 2018 GDP after administrative review.
- Policy imperative: adoption of a credible plan to prioritize repayment of social arrears (especially pensions) and resolve domestic arrears to government suppliers is essential to protect basic income, support growth and preserve financial sector stability (Annex IV). This is an urgent short-term economic priority.

### Debt restructuring, public debt, and financing gap
- Total public debt in 2018: estimated at 87¾ percent of GDP.
  - External debt representing 61¾ percent of GDP.
  - Large external debt exposures: China 21.4 percent of GDP; oil traders 16.4 percent of GDP.
- External payment arrears:
  - End-2017: CFAF 453 billion (US$817 million).
  - End-2018: CFAF 520 billion (US$908 million).
- Post-HIPC official bilateral arrears increased from CFAF 33 billion (about $60 million) to about CFAF 75bn ($130 million).
- China debt restructuring (April 2019) terms (MEFP ¶33):
  - Payment of 1/3 of the stock of debt over three years.
  - Rescheduling of the remainder 67 percent through a 15-year extension and an average interest rate of about 1.7 percent.
  - Effects: reduce debt service during program period by about $370 million; cut debt service immediately after the program (2023–28) by about half; ensure debt service below 0.5 percent of GDP per year for 2029–45.
- Financing gap for the program period (2019–22): about CFAF 1084 billion (about $1.9 billion) after fiscal adjustment and incorporation of China restructuring.
  - This is a reduction of about 2/5 compared with July 2018 preliminary staff assumptions.
- Text Table 6 (program financing, 2019–22; selected figures):
  - Financing gap: 36 24 11 24 56 -3 1,084
  - New external financing: 270 229 229 520 780
  - World Bank: 57 57 56 00 171
  - African Development Bank: 131 66 66 00 262
  - France: 30 30 30 00 89
  - IMF: 527 878 520 259
  - Exceptional financing from debt restructuring: 132 220 525 0 -1454
    - External creditors: 96 177 71 6 -34295
    - Domestic creditors: 36 42 46 34 33 15 8
  - Restructured contingent liabilities: -39 -38 -37 -35 -34 -149
  - Residual financing gap (- = overfinancing): 0 0 0 0 0 0
- Exceptional financing from debt restructuring expected to cover about 42 percent of the financing gap for 2019–22.
- The restructuring strategy is projected to bring the present value (PV) of total public debt below 35 percent by 2025.

### Restructuring approach and conditions
- Authorities’ announced strategy:
  - External commercial creditors: receive a nominal haircut.
  - Domestic debt (including domestic arrears but excluding BEAC advances, the regional bond and Treasury bills): take a nominal haircut and be gradually repaid over the medium term. The domestic restructuring depends on the new audit results which will define outstanding claims and any discount factors for extrabudgetary or irregular claims.
  - Other official external creditors: do not participate in the restructuring and would have their post-HIPC external arrears cleared before the first program review.
- Goal: complete restructuring of external commercial debt and domestic debt by the time of the first program review (MEFP ¶33).
- Domestic restructuring must safeguard financial sector stability and vulnerable groups (Annex IV).

### Contingent liabilities and debt management reforms
- Contingent liabilities (e.g., Commisimpex debt and stock of rejected domestic arrears) threaten debt sustainability and are addressed up front in the strategy.
- Projections for government deposits include a buffer to pay debt service on these contingent claims if they materialize.
- IMF TA recommendations to strengthen debt management to be implemented:
  - Bolster coordination role of the National Public Debt Committee (NPDC), including issuing an opinion on any new debt project based on a DSA.
  - Improve compliance with CEMAC debt management guidelines (e.g., annex debt management strategy to the finance law; ratify loan agreements by the NPDC).
  - Increase training for debt unit staff, including on debt sustainability analysis.
- Institutional steps taken:
  - March 2018 AFC TA mission updated legal texts establishing the NPDC and developed a draft manual of procedures.
  - Manual adopted by NPDC in May 2019 specifies obligation of stakeholders to transmit all relevant debt information to the Debt Unit (Caisse Congolaise de l’Amortissement) and limits ability to take on new debt outside the framework.
  - Program establishes a zero limit on guaranteeing debt with future natural resource deliveries (including oil), prohibits pre-financing and oil-for-infrastructure barter arrangements, and limits borrowing to concessional loans.
- Recommendation: timely publication of consolidated government debt statistics, including assets and liabilities of all state-owned enterprises, to improve fiscal risk control and program monitoring (MEFP ¶34).

### Structural reforms: governance, transparency, and anti-corruption
- Diagnosis and prior actions:
  - Diagnostic report on governance and corruption prepared and published June 2018 (prior action).
  - Report assesses vulnerabilities in Rule of Law, PFM systems, Financial Sector Oversight, Market Regulation and Business Climate, AML/CFT and Anti-Corruption Framework, and proposes an action plan.
- Measures already taken (Box 4 highlights):
  - Submission to Parliament of reports on SNPC’s pre-financing arrangements, large investment projects implemented during 2014–17, and special oil-backed contracts with oil operators.
  - Steps to improve oil sector governance: replacing senior management at SNPC; law requiring annual external audit of SNPC accounts; placing SNPC under tutelage of Ministry of Hydrocarbons with written contract; resumption of publication of KPMG reconciliation reports.
  - May 2019: law passed to establish oversight committee for the transparency law; committee of 11 members includes 6 from CSOs, specialized professions and the press. Passage of implementing decree to operationalize the committee proposed as structural benchmark for end-September 2019.
  - February 2019: law enacted creating a new, independent anti-corruption commission with investigative powers; adoption of implementing decree proposed end-September 2019 structural benchmark; amendment of anti-corruption law to ensure full compliance with UNCAC proposed end-March 2020 structural benchmark.
  - February 2019: law enacted requiring senior government officials to disclose assets; authorities committed to work with staff to address shortcomings in the asset disclosure law.
- Remaining priorities:
  - Strengthen PFM controls to prevent appearance of invalid claims.
  - Improve oversight and accountability over SOEs, including SNPC; consider explicit borrowing framework for SOEs at the first review.
  - Undertake a Fiscal Transparency Evaluation (FTE) with Fund assistance.

*Source: 1cogea2019001 (IMF staff report content provided).*

### 33.      The authorities will take measures to strengthen the PFM system and  revamp the

### 1cogea2019001 - 33. The authorities will take measures to strengthen the PFM system and revamp the public investment framework

### Public financial management (PFM) and public investment framework
- Planned measures:
  - Conduct a Public Expenditure Tracking Survey (PETS) of 2014–18 projects, in consultation with the World Bank, to identify losses in investment processes.
  - Conduct a Public Investment Management Assessment (PIMA) to strengthen the public investment management framework.
  - Develop a pipeline of projects ranked by priority based on adequate feasibility studies and cost-benefit analysis (with assistance from the African Development Bank).
  - End the practice of supplier-lender procurement by dissociating the negotiation and signing of loan agreements from the awarding of contracts to ensure a more competitive tendering process.
- External control strengthening:
  - At the time of the first review, staff will urge adoption of a law on the organization and functions of the supreme audit institution of Congo (Cour des Comptes et Discipline Budgétaire, CCDB) and its implementing regulations.
- Additional context:
  - Additional medium-term PFM measures are aligned with recommendations from the 2014 PEFA, 2015 PEMFAR, IMF TA reports, the authorities’ medium-term governance strategy in the RGC (2018), and annex V.
  - The authorities plan to request TA from FAD on the Expenditure Assessment Tool to link spending and outcomes.

### Promoting diversification and more inclusive growth
- Growth diagnosis and objective:
  - For the past three decades, non-oil growth was driven by accumulation of capital stock and labor (Annex III).
  - Capital in the non-oil sector accounted for almost half of total growth in 2004–14, sustained by record-high public investment.
  - Negative TFP growth held back non-oil growth despite tripling of the capital stock.
  - The program’s main objective is to restore non-oil growth back to its potential rate by boosting human capital and productivity through diversifying the economy with priority given to agriculture, tourism, and industry (MEFP ¶50–51).
  - This shift to productivity-led growth is consistent with PREF-CEMAC and the draft PND 2018–22.
- Business environment focus:
  - Business-friendly reforms should target areas where Congo fares poorly (Text Figure 12) (MEFP ¶13).

### Social sectors: education, health, and social protection
- Education:
  - Policies aim to provide universal basic education and amend curricula to better match private sector skill demand.
  - Focus on pre-tertiary education is emphasized as sound and consistent with Congo’s development level and private sector needs.
- Health:
  - Authorities plan to finalize construction of 14 district hospitals.
  - Introduce performance-based financing to expand access to health services and increase government accountability.
  - Staff advised prioritizing efficiency-enhancing measures and gradually resuming infrastructure building as capable medical personnel are identified.
- Social protection and gender:
  - Policies aim to improve use of health and education services for children, the elderly, and the poorest households.
  - Staff supports expansion of the social safety net for poor households and allocation of budgetary resources to support women (training centers, combating gender-based violence, etc.).
  - 2019 budget envisages:
    - Construction of rehabilitation centers for women and girls who have been victims of violence.
    - Economic empowerment of women through support for women’s savings banks (including promotion of income-generating activities for child mothers).
    - Implementation of active gender policies with emphasis on combatting gender-based violence and support for HIV/AIDS prevention.

### Sectoral diversification: agriculture, energy, and business climate
- Agriculture:
  - Government aims to modernize family farming and promote agribusiness, including facilitating market access of small producers' organizations (MEFP ¶51).
- Energy:
  - Intent to improve operational and commercial performance through reforming public service provision and the regulatory framework (MEFP ¶52).
- Business environment measures:
  - Simplifying procedures and reducing informal payments to start a business, pay taxes, trade across borders, register property, and obtain building permits.
  - Intend to reduce and regularize parafiscal taxes, establish a single servicing point for property transactions, and strengthen public records through computerization.

### Financial sector: stability, NPLs, and development
- Stability and bank resolution:
  - Addressing weak banks and high non-performing loans (NPLs) is essential to maintain financial sector stability.
  - Banking system remains solvent overall despite liquidity tensions and rising NPLs; overall solvency ratio is above the regulatory minimum due to capital increases by large banks.
  - Authorities will adopt a strategy for orderly restructuring or resolution of the weakest banks, in consultation with COBAC (MEFP ¶35).
  - Absent investors’ interest for an insolvent bank, it will be liquidated without injection of public resources.
  - Insured depositors will be protected via the deposit insurance scheme (FOGADAC).
  - A timely resolution—by end-September 2019—is important to support enhanced regional supervision and governance.
- NPL reduction and recapitalization:
  - Staff supports reducing NPLs by facilitating clearance of domestic arrears after their restructuring and sound implementation of the Fund-supported program to prevent new arrears.
  - Annex IV estimates that recapitalization needs of insolvent banks in the case of large haircuts on government claims on the private sector could reach 1.6 percent of GDP.
- Financial sector development steps:
  - Develop a financial sector development strategy in close collaboration with regional authorities and external partners.
  - Accelerate implementation of credit and collateral registries, strengthen legal and judicial capacity for financial litigation, and encourage microfinance and mobile banking to reduce large collateral requirements and own capital contributions for loans.

### Improving data, statistics, and transparency
- Transparency and accountability:
  - Persistent efforts to enhance transparency are necessary to strengthen policy making, foster efficiency, and improve accountability.
  - Systematic data publication will increase government accountability and compliance with laws and regulations.
  - Staff stressed anchoring credibility of the governance strategy by regularly informing the public on management of oil resources, oil-backed debts, and public investment during the previous oil price boom (Box 4 and ¶43).
- Statistical improvements:
  - Critical need: establishment of a government website with reliable public access (MEFP ¶40).
  - Authorities have published new data series: monthly inflation rate and quarterly projections for government finance statistics, and quarterly outturns on domestic and external debt stock and debt service.
  - Staff urged adoption and implementation of the emergency plan for the improvement of statistical systems, including strengthening the mandate of the National Institute of Statistics and other statistics agencies.
  - Government receiving technical and financial support from the World Bank through the Statistical Capacity Building Project (PSTAT) and has sought IMF Statistics Department assistance for a comprehensive review.

### Program modalities, financing, safeguards, and risks
- ECF request and access:
  - Authorities requested a 36-month arrangement under the Extended Credit Facility (ECF), with access set at SDR 324 million (200 percent of quota).
  - Justification: size and protracted nature of the BOP need, strength of the proposed program, and Congo’s capacity to repay the Fund.
- Balance of payments and financing gap:
  - The oil price shock contributed to a large and protracted balance of payments need of US$1.91 billion over 2019–22.
  - Despite projected increase in oil production, revenues would remain relatively weak by historical levels; further fiscal adjustment would be undesirable given weak economic activity and need to protect basic social programs.
  - Access under the proposed ECF arrangement will cover 24 percent of the projected external financing gap over 2019–22, and about one-third of new external financing.
  - Another 48 percent of the financing gap would be filled by other multilateral and bilateral partners (the World Bank, the African Development Bank, and France).
  - The remainder of the financing gap (28 percent) will be covered by debt restructuring (Annex I).
  - For the first year of the program, firm commitments of full program financing are in place; good prospects for full program financing exist for the remainder of the program period.
- Capacity to repay and IMF track record:
  - Congo has implemented eight Fund-supported programs.
  - SDR 2.42 million outstanding as of end-May 2019.
  - Congo’s debt service to the IMF as a share of its export of goods and services will peak in 2026 at 4.9 percent before declining to 0.1 percent in 2031 (Table 10).
- Prior actions implemented:
  - First round (before July 2018): adopted 2018 budget on December 27, 2017 in line with program; published a diagnostic study on governance and corruption issues on June 19, 2018; submitted draft amendment to law establishing SNPC on June 18, 2018 to make publication of audited financial statements obligatory.
  - Second round (before end-May 2019): submitted three reports to Parliament on SNPC’s pre-financing agreements with oil traders, large infrastructure projects between 2014–17, and special agreements with oil operators to finance infrastructure through in-kind payments; published oil reconciliation reports audited by KPMG.
- Main program risks and mitigations:
  - Most serious risk: faltering commitment to governance reforms and difficulty maintaining high fiscal surpluses over time.
  - Mitigants: Congo’s historical capacity to maintain high primary surpluses; backloaded access profile; large share of fiscal adjustment and structural reforms already implemented during the pre-program period.
  - Contingent measures discussed: additional expenditure consolidation on goods and services and nonsocial transfers to address possible revenue shortfalls.
  - Program includes adjustors for deviations in oil or privatization receipts and net external assistance (TMU ¶25–26).
  - Delays in delivering committed debt relief and slippages in debt restructuring are additional risks; measures to address possible domestic debt surprises were discussed (Box 5).

### Debt restructuring, arrears, and creditor engagement
- Debt restructuring progress and impact:
  - A credible process is in progress to complete Congo’s debt restructuring and help restore debt sustainability.
  - Conclusion of a debt restructuring agreement with China, combined with planned restructuring of external commercial debt, should bring debt service within program parameters.
  - Authorities assisted by legal and financial advisors; have shared information and held several rounds of “good faith” negotiations with external creditors, primarily oil traders.
- External arrears:
  - External official and commercial arrears amounted to about US$0.9 billion as of end-May 2019.
  - Of this, US$494 million pre-date the HIPC Completion point; the remainder (about US$414 million) arose due to fiscal difficulties associated with the 2014 fall in oil prices.
  - Authorities have credible plans to clear US$13.3 million arrears to multilateral and plurilateral institutions over the program period.
  - Authorities are resolving post-HIPC official arrears to Paris Club bilateral creditors (US$129.6 million) and other official bilateral creditors (US$31.2 million).
  - Creditors have provided consent for the provision of Fund financing notwithstanding these official arrears, which authorities intend to resolve before the first review.
  - Arrears to commercial creditors amount to US$240.4 million; staff has ascertained that the Republic of Congo is making good faith efforts to reach collaborative agreements with commercial creditors.
  - Fund may provide financing to Congo notwithstanding its external arrears to commercial creditors given Congo’s policies and good faith efforts.

### Regional institutions and policy assurances
- BEAC and COBAC actions:
  - BEAC and COBAC have pursued implementation of policy commitments; BEAC provided an updated policy assurance on end-December 2019 NFAs in support of CEMAC countries’ Fund-supported programs.
  - BEAC submitted new foreign exchange regulations to the UMAC ministerial committee and operationalized the new monetary policy framework by end-2018.
  - End-2018 regional policy assurance on NFAs was exceeded.
  - In its updated letter of policy support, BEAC presented a revised projection for end-December 2019 NFAs and reiterated commitment to implement an adequately tight monetary policy to achieve NFA projections, while member states implement adjustment policies in IMF-supported programs.
  - NFA assurances by BEAC are critical for success of the Republic of Congo’s program and will help bolster the region’s external sustainability.

*Source: 1cogea2019001 - 33. The authorities will take measures to strengthen the PFM system and revamp the public investment framework.*

### 49.      In addition, the BEAC continues to implement the remaining recommendations of the

### 1cogea2019001 - 49.      In addition, the BEAC continues to implement the remaining recommendations of the

### BEAC reform and accounting transition
- BEAC continues to implement the remaining recommendations of the 2017 safeguards assessment.
- BEAC’s full transition to IFRS for FY 2019 is progressing "broadly as planned".
- Efforts are being stepped up to accelerate revisions to the secondary legal instruments for alignment with the BEAC Charter.
- Adoption of the revised secondary legislations was extended beyond the initial timeline ("June 2018") to allow for further consultation with stakeholders, including IMF staff.

### Box 5 — Addressing Debt Surprises: key findings
- Significant changes in debt information and fiscal accounts were disclosed in June 2017:
  - US$2.3 billion of an outstanding stock of oil-backed pre-financing arrangements.
  - New domestic private sector claims of US$3.2 billion, of which US$1.4 billion were later rejected by the authorities.
  - About US$½ billion equivalent in annual withholdings of government oil every year—not reported in government finance statistics until April 2018—to pay oil companies for infrastructure they built and other transactions.
- All changes in oil-related debt stocks resulted from reconciling the valuation of the government’s share in oil from production sharing agreements with the oil revenue collected by the treasury.
- Oil reconciliation exercise also identified additional revenue of about US$250 million every year previously not reported in fiscal data, with matching uses including:
  - Transfers to the oil refinery for investment or to keep fuel prices low.
  - Payments of the government’s share in the operating costs of five oil fields where it participates.
- Authorities argued some transactions should not be in fiscal accounts because they are not cash operations and loans from traders were contracted by SNPC, not directly by the government.
- Weak PFM practices and absence of a centralized debt management framework led to deficiencies in reporting contracted debt by government administrations.

### Box 5 — Actions taken by authorities
- Cooperated with Fund staff to complete an oil reconciliation exercise.
- Completed an audit of domestic arrears accumulated over 2014–16.
- Agreed to complete by October 2019 another audit for arrears accumulated in 2017–18.
- Completed an inventory of special agreements with oil companies giving them rights on government oil, and included all special agreements in the scope of the debt restructuring.
- Adopted in May 2019 a manual on debt procedures specifying the obligation of all stakeholders to transmit all relevant debt information to the Debt Unit (CCA).
- Agreed to:
  - Refrain from contracting new pre-financing agreements and oil-for-infrastructure barter arrangements.
  - Formulate proposals for domestic debt restructuring once the government approves a final timetable for the repayment of domestic debt, based on results of the new audit of domestic arrears.
  - Increase fiscal consolidation efforts in case new debt surprises or contingent liabilities materialize.

### Staff appraisal — governance and fiscal outlook (summarized findings and recommendations)
- Recent actions:
  - Authorities have taken decisive steps to improve governance and place public finances on a sustainable path.
  - Turnaround in public finances in 2018 was "particularly impressive", and public debt declined by 30 percent of GDP (noting this includes favorable developments in oil production and prices).
- Short-term recovery depends on steady implementation of the program. Staff commends:
  - Approval and execution of a prudent budget for 2019.
  - Pursuit of a large number of structural reforms.
  - Recent conclusion of a debt restructuring agreement with China.
- Policy priorities and recommendations:
  - Pursue fiscal consolidation, including decisive efforts to boost non-oil revenues to protect development spending (public investment and critical social programs).
  - Ensure vulnerable groups are protected through effective execution of higher social spending levels defined with IMF and World Bank staff.
  - Pay special attention to active policies to reduce gender gaps, including:
    - Protection of expenditures for construction of rehabilitation centers for victims of violence.
    - Focus on income-generating activities for young mothers.
    - Support for HIV/AIDS prevention.
- Governance and transparency:
  - Recent reforms are welcomed but further action is needed; recent efforts have only partially changed years of weak economic management and poor historical governance and transparency.
  - Authorities should operationalize recent laws (including on asset declarations and the anti-corruption commission) quickly and ensure alignment with international standards and best practices.
  - Communication with the public and civil society is important to increase confidence and legitimacy.
  - After parliamentary review, reports on large infrastructure projects, pre-financing agreements concluded by SNPC, and special agreements to finance infrastructure with in-kind payments should be published.
- Growth and private sector confidence:
  - Government faces the challenge of reigniting growth while keeping spending under check amid weak private sector confidence.
  - Authorities should focus on enhancing productivity (improving access to health services, boosting investments in vocational training), engage with the private sector, and communicate plans to resolve domestic arrears and improve the business environment.
- Debt sustainability and restructuring:
  - Despite recent decline, debt remains unsustainable and further progress on restructuring commercial debt is needed.
  - Authorities need to pursue good faith efforts to restructure commercial debt, especially with oil traders, considering Congo’s financial capacity and program objectives.
  - This debt is costly and should be restructured before the first review.
  - In the run up to a debt restructuring agreement, the government indicated it would deposit resources in an escrow account and keep them available to repay creditors on demand after restructuring.
  - With assistance from debt advisors, the government should develop a strategy to resolve residual uncertainties on its debt in the context of overall debt restructuring.
  - Authorities should refrain from contracting new non-concessional loans before public finance sustainability is unequivocally restored.
  - Urgent need to strengthen public debt and asset management (see DSA supplement; ¶14 and ¶16).

### IMF financing decision and program risks
- Staff supports the authorities’ request for assistance under the ECF in the amount of 200   percent of quota.
- Rationale:
  - The ECF arrangement will allow Congo to strike an appropriate balance between adjustment and financing.
- Risks and conditionality:
  - Congo is a fragile state with considerable risks of political instability if governance reforms do not translate into higher public support.
  - Country remains vulnerable to new declines in international oil prices, which would reduce government revenue and complicate debt sustainability restoration.
  - Critical that authorities follow through on governance commitments to mitigate risks.
  - Staff proposes that completion of the first review under the ECF be conditional on implementation of critical policy assurances at the union level, as established in the June 2019 union-wide background paper.

### Selected exact fiscal and macroeconomic statistics (extracts preserved verbatim)
- Public debt declined by 30 percent of GDP (2018 change noted in text).
- Oil-related revelations (June 2017):
  - US$2.3 billion — outstanding stock of oil-backed pre-financing arrangements.
  - US$3.2 billion — new domestic private sector claims (US$1.4 billion later rejected).
  - about US$½ billion equivalent — annual withholdings of government oil not reported until April 2018.
- Additional oil revenue identified: about US$250 million every year.
- Staff supports ECF request in the amount of 200   percent of quota.
- Relevant dates and actions:
  - BEAC full transition to IFRS for FY 2019.
  - Adoption of debt procedures manual in May 2019.
  - Audit of domestic arrears for 2014–16 completed; audit for 2017–18 agreed to be completed by October 2019.

_Italic: Source — 1cogea2019001 - 49. In addition, the BEAC continues to implement the remaining recommendations of the (Republic of Congo, IMF country report excerpt)._

### Annex budgets and special Accounts

### 1cogea2019001 - Annex budgets and special Accounts

### Fiscal aggregates (2016–23, percent of GDP)
- Total revenue and grants: 34.1, 27.9, 34.9, 29.2, 31.4, 32.1, 32.7, 34.2, 34.7
- Revenue: 33.2, 27.3, 34.4, 29.1, 30.9, 31.7, 32.3, 33.7, 34.1
- Oil revenue: 15.2, 13.1, 20.9, 19.9, 19.2, 18.1, 17.8, 17.2, 16.4
  - of which: repayment of oil-prepurchased debt: 2.8, 2.4, 5.9, 3.5, 5.4, 5.3, 5.2, 5.2, 5.2
- Non-oil revenue: 18.0, 14.2, 13.5, 9.2, 11.7, 13.6, 14.5, 16.4, 17.7
  - Direct taxes: 7.7, 6.2, 5.8, 3.9, 5.0, 5.6, 6.2, 7.0, 7.5
  - Taxes on goods and services: 7.1, 5.7, 5.3, 3.6, 4.8, 5.5, 5.7, 6.5, 6.9
  - Customs Receipts: 2.7, 2.1, 2.1, 1.5, 1.7, 2.1, 2.2, 2.6, 2.8
  - Non-tax revenue: 0.5, 0.2, 0.3, 0.2, 0.3, 0.4, 0.4, 0.4, 0.5
- Grants: 0.9, 0.6, 0.5, 0.1, 0.4, 0.4, 0.4, 0.5, 0.6

- Expenditure and net lending: 54.1, 35.2, 27.8, 22.6, 23.8, 24.4, 25.1, 26.3, 27.4
  - Current expenditure: 29.5, 25.1, 23.2, 20.4, 19.4, 19.0, 19.1, 19.8, 20.6
    - Wages: 8.2, 7.5, 6.4, 5.6, 5.7, 6.0, 6.1, 6.4, 6.9
    - Other primary current expenditure: 18.1, 15.1, 13.6, 12.2, 11.4, 11.5, 11.6, 12.1, 12.7
      - Goods and services: 5.4, 4.2, 3.1, 2.7, 2.9, 2.9, 3.0, 3.2, 3.4
      - Transfers: 11.0, 9.4, 9.9, 8.9, 8.0, 7.9, 7.9, 8.2, 8.6
        - Traditional transfers: 6.8, 5.7, 5.1, 3.9, 5.4, 5.1, 4.9, 5.1, 5.4
        - Oil-related transfers: 4.2, 3.7, 4.8, 5.0, 1.8, 1.9, 1.9, 2.0, 2.0
  - Common charges: 1.7, 1.5, 0.6, 0.6, 0.6, 0.7, 0.7, 0.8, 0.8
  - Interest: 2.7, 2.1, 2.3, 2.3, 1.8, 1.5, 1.4, 1.2, 1.0
    - Domestic interest: 0.3, 0.6, 0.4, 0.4, 0.3, 0.3, 0.2, 0.2, 0.2
    - External interest: 2.4, 1.6, 1.9, 1.9, 1.5, 1.2, 1.1, 1.0, 0.8
      - of which: on oil-prepurchased debt: 1.9, 1.4, 1.1, 1.3, 0.8, 0.5, 0.3, 0.2, 0.0

- Capital expenditure (percent of GDP): 19.4, 7.9, 4.6, 2.2, 4.5, 5.4, 6.0, 6.5, 6.8
  - Domestically financed: 12.6, 3.1, 2.3, 1.4, 2.3, 2.5, 3.3, 3.9, 4.2
  - Externally financed: 6.8, 4.8, 2.3, 1.0, 2.2, 2.2, 2.2, 2.1, 2.1
- Net lending: -0.3, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0

### Balances and fiscal targets (percent of GDP)
- Non-oil primary balance: -32.6, -18.3, -11.5, -11.0, -9.9, -8.9, -8.8, -8.1, -8.2
- Basic non-oil primary balance: -26.7, -14.1, -9.7, -10.2, -8.1, -7.2, -7.0, -6.6, -6.6
  - ― excluding oil-related transfers: -22.5, -10.4, -4.9, -5.2, -6.3, -5.3, -5.2, -4.6, -4.5
- Reference fiscal balance (CEMAC definition): -1.5, -0.7, 0.0, -4.7, -0.8, 2.6, 4.9, 5.7, 5.2
- Primary balance: -17.4, -5.2, 9.5, 8.9, 9.3, 9.2, 9.0, 9.1, 8.3
- Overall balance, payment order basis:
  - Excluding grants: -21.0, -8.0, 6.6, 6.6, 7.1, 7.2, 7.2, 7.4, 6.7
  - Including grants: -20.1, -7.4, 7.1, 6.6, 7.5, 7.6, 7.6, 7.9, 7.3
- Change in arrears: 3.5, 0.8, -0.1, -0.2, 0.0, 0.0, 0.0, 0.0, 0.0
  - External: 1.3, 0.3, 0.0, 1.0, 0.0, 0.0, 0.0, 0.0, 0.0
  - Domestic: 2.2, 0.4, 0.0, -1.3, 0.0, 0.0, 0.0, 0.0, 0.0
- Overall balance, cash basis: -16.6, -6.6, 7.1, 6.4, 7.5, 7.6, 7.6, 7.9, 7.3

### Financing (percent of GDP)
- Financing (net): 16.6, 6.6, -16.0, -6.4, -13.1, -13.9, -11.3, -8.9, -6.8
- Foreign (net): 5.1, 5.0, -5.1, -3.2, -8.2, -7.1, -4.5, -3.8, -1.8
  - Drawings: 9.4, 8.2, 1.8, 0.7, 1.9, 1.7, 1.7, 1.5, 1.6
  - Amortization due: -5.3, -4.9, -8.5, -5.2, -10.1, -8.9, -6.2, -5.3, -3.4
    - of which: on oil-prepurchased debt: -0.9, -1.2, -4.7, -2.2, -4.6, -4.6, -1.7, -1.9, -1.0
  - Debt cancellation: 0.0, 1.1, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0
  - Other foreign financing: 1.0, 0.7, 1.7, 1.3, 0.0, 0.0, 0.0, 0.0, 0.0
    - of which: deposits in China: 1.0, 0.7, 1.7, 1.3, 0.0, 0.0, 0.0, 0.0, 0.0
- Domestic (net): 11.5, 1.6, -10.9, -3.1, -4.8, -6.8, -6.9, -5.1, -4.9
  - Banking system (net): 14.2, 2.0, -5.3, 0.5, -2.2, -3.7, -3.7, -2.5, -2.4
    - Central bank: 10.7, 2.1, -4.4, 0.4, -2.3, -3.4, -3.4, -1.3, -1.5
    - Commercial banks: 3.5, -0.2, -0.8, 0.1, 0.1, -0.3, -0.3, -0.3, 0.0
  - Nonbank financing: -2.7, -0.4, -5.6, -3.7, -2.6, -3.0, -3.2, -2.7, -2.6
    - Of which: Repayment of domestic arrears: (projections) ... -2.7, -3.2, -3.5, -2.7, -2.6
    - Of which: Debt service to ENI: -2.4, -2.1, -2.7, -1.1, 0.0, 0.0, 0.0, 0.0, 0.0

- Financing gap (- = surplus): 0.0, 0.0, 8.9, 0.0, 5.5, 6.2, 3.7, 1.0, -0.5
- Expected financing (excluding IMF): 0.0, 0.0, 3.7, 0.0, 3.3, 2.3, 2.3, 0.0, 0.0
- IMF-ECF: 0.0, 0.0, 0.4, 0.0, 0.8, 1.2, 1.2, 0.8, 0.0
- Exceptional financing from debt restructuring: 0.0, 0.0, 4.7, 0.0, 1.4, 2.8, 0.2, 0.2, -0.5

### Arrears, deposits, and GDP (levels and percent of GDP where given)
- Stock of government deposits (percent of GDP): 4.4, 1.8, 6.0, 1.0, 3.3, 6.6, 10.0, 10.7, 11.2
- Stock of domestic arrears (percent of GDP): ... , 18.9, ... , 15.2, 12.4, 9.1, 5.6, 3.1, 0.5
- GDP at current market prices (CFAF billion): 4,616; 5,189; 5,760.0; 6,476; 6,529; 6,578; 6,611; 6,432; 6,449
- Non-oil GDP at market prices (CFAF billion): 2,908; 2,695; 2,544.4; 2,544; 2,603; 2,715; 2,888; 3,089; 3,316

### Quarterly central government flows (selected 2018–20 flows, Billions of CFA francs)
- Total revenue and grants (2018 annual): 1,888; Q1: 438; Q2: 466; Q3: 437; Q4: 551; Annual: 593; 2,048 (act./proj. series shown)
- Revenue (2018 annual): 1,882
- Oil revenue (2018 annual): 1,288
  - of which: repayment of oil-prepurchased debt: 398 (Q1 2018 listed)
- Non-oil revenue (2018 annual): 594
- Expenditure and net lending (2018 annual): 1,461; Current expenditure: 1,320; Capital expenditure: 141
- Overall balance, cash basis (selected cumulative flows): 412 (Q1 2018), 131 (Q2 2018), 324 (Q3 2018), 761 (Q4 2018), 366 (2019 projections in series)

(Quarterly tables include more granular flow detail: draws, amortization, deposits in China, central bank and commercial bank flows, arrears movements, and financing gaps; the series above reflect selected totals and key line items as presented.)

*Sources: Congolese authorities; and IMF staff estimates and projections.*

### Annex budgets and special Accounts

### Annex budgets and special Accounts

### Fiscal balances, budget aggregates, and public expenditure
- Interest: 147; 265782119; 1192248; 69100100.
- Capital expenditure: 14125113243293293; 35136287; 357357.
  - Domestically financed: 92; 2554104150; 1503578; 149215215.
  - Externally financed: 50059139143143059; 138142142.
- Off-budget expenditure: 0; 0000; 000; 000.
- Net lending: 0; 000000; 0000.
- Non-oil primary balance: 2; -714-77-249-440-647-647-65-231-419; -587-587.
- Basic primary balance: 618212374609725725209361580717717.
- Basic non-oil primary balance: 3; -670-77-194-311-531-531-65-177-292-473-473.
  - ― excluding oil-related transfers: 4; -329-43-125-220-413-413-34-116-200-350-350.
- Primary balance: 574212; 320480; 610; 610209; 307; 452603603.
- Overall balance, payment order basis: 0000000000.
  - Excluding grants: 421186258388464464187; 254373475475.
  - Including grants: 427186263399491491187259; 383503503.
- Change in arrears: -151381381381121120; 0000.
  - External: 5; 67; 112112; 112112; 11200000.
  - Domestic: 6; -82262626; 02600000.
- Overall balance, cash basis: 412324401537603; 603187259383503503.

### Financing, deposits, and domestic financing composition
- Financing (cumulative sequence): -412-329-405-587-853-853-359-523-801-914-914.
- Foreign (net): -210-267-357-454 -538-538 -158-266-349-469-469.
- Drawings: 4403077122; 12202872114114.
- Amortization due: -339-171-291-434-660 -660-158-294-421-583-583.
  - of which: on oil-prepurchased debt: -144...-76-151-303-303-75-150-225-300 -300.
- Deposits in China: 860000000000.
- Domestic (net): -203-62-48-133-315 -315-201-257-452-445-445.
  - Central Bank (net): 27014-37-150-150-86-100-238-224-224.
  - Commercial banks (net): 800055000-20-20.
- Nonbank financing: -237-98-98-132-170-170-115-157-214-200-200.
  - Of which: Repayment of domestic arrears: 000-35-176-176-42-84-125-209-209.
  - Of which: Debt service to ENI: -74 0000000000.
- Financing gap (- = surplus): 00 045362362172264418411 411.
- Expected financing (excluding IMF): 00002192195555149149 149.
  - World bank: 0000565655555555 55.
  - African Development Bank: 00001331330006565.
  - France: 00 00303000029 29.
  - IMF-ECF: 00 02652523838767676.
  - Exceptional financing from debt restructuring: 7; 00019929279171193186186.

### External sector — Balance of payments (Table 4)
- Current account (CFA francs): -2,931; -307; 243; 433; 363; 337; 109; -88; -120.
  - of which non-oil: -2,089 -1,008 -1,192 -938 -896 -951 -1,040 -1,023 -972.
- Trade balance: -1,225; 1,407; 2,439; 2,890; 2,875; 2,711 2,494; 2,107; 1,979.
  - Exports, f.o.b.: 2,583; 3,569; 4,061; 5,160; 5,197; 5,105 4,979; 4,618; 4,498.
    - Oil sector exports: 1,847; 2,852; 3,635; 4,439; 4,447; 4,350; 4,201; 3,803 3,580.
    - Non-oil exports: 736; 717; 426; 721; 749; 755; 778 815; 917.
  - Imports, f.o.b.: -3,807; -2,162; -1,622; -2,270; -2,321; -2,394; -2,485; -2,512 -2,519.
    - Oil sector imports: -1,237; -656; -643; -961; -1,021; -1,005; -1,026; -989; -933.
    - Government imports: -947; -390; -158; -254; -234; -285; -317; -335; -349.
    - Non-oil private sector imports: -1,624; -1,117; -821; -1,056; -1,067; -1,103; -1,143; -1,188; -1,237.
- Balance of services: -1,171 -1,050 -1,524 -1,451 -1,545 -1,472 -1,461 -1,369 -1,309.
  - Oil sector services: -867 -816 -1,012 -1,193 -1,271 -1,208 -1,187 -1,090 -1,028.
  - Non-oil sector services: -304 -233 -512 -259 -274 -264 -274 -279 -281.
- Income: -232 -404 -635 -749 -722 -654 -666 -565 -520.
  - Labor income: -31 -8 -23 -34 -32 -30 -28 -21 -17.
  - Investment income: -200 -396 -612 -715 -689 -623 -638 -544 -503.
- Current transfers (net): -304 -261 -36 -256 -246 -249 -258 -261 -270.
- Capital account: 3480 3042 2222 2215 15.
  - Official grants: 40 30 30 10 28 28 28 15 15.
  - Debt cancellation: 0570000000.
- Financial account: 1,968 -22 -557 -501 -580 -473 -781 282 01.
  - Direct investment (net): 1,738 194 1,154 190 266 273 272 300 315.
  - Portfolio investment: -20 -1 -19 -1 -1 -1 -1 -1 -1.
  - Other investment: 251 -216 -1,692 -690 -845 -745 -349 -172 -114.
    - Medium and long term: 520 54 -449 -518 -744 -488 -192 -205 -88.
      - Public sector: 320 185 -387 -229 -538 -469 -295 -244 -118.
        - Drawings: 508 424 103 441 221 141 159 9 102.
        - Amortization: -246 -257 -491 -339 -660 -583 -410 -343 -220.
        - Net change in arrears: 58 170 670 0 0 0.
- Overall balance of payments: -927; -249; -284; -64; -194; -114; 545; 596.
- Reserve financing (accumulation = ─): 880 213 -325 -22 -168 -298 -299 -121 -64.
- Expected financing (excluding IMF): 214 0218152152 00.
- IMF-ECF: 25 0527878 520.
- Exceptional financing from debt restructuring: 3; 273092 1821615 -35.

### Monetary conditions and liquidity (Table 5)
- Net foreign assets (CFA billion): 461 212 490 252 181 198 244 351 568 789 863 928.
  - Central bank: 393 180 480 202 181 189 229 319 539 760 829 890.
  - Deposit money banks: 6832 1049 -0 1015 32 2930 3537.
- Net domestic assets: 1,510 1,554 1,506 1,443 1,425 1,367 1,403 1,472 1,427 1,449 1,450 1,449.
  - Net domestic credit: 1,744 1,807 1,511 1,772 1,724 1,603 1,586 1,708 1,597 1,514 1,560 1,574.
    - Net credit to the public sector: 506 596 316 636 625 613 557 543 376 210 159 64.
      - Net credit to the Government: 498 600 321 634 630 618 562 542 375 208 158 63.
        - Central bank claims/deposits series listed (e.g., Claims 578 577 600 575; Deposits -205 -93 -346 -64 -68 -79 -161 -213 -437 -661 -686 -721).
    - Credit to the economy1/: 1,239 1,212 1,194 1,136 1,099 990 1,029 1,165 1,221 1,304 1,401 1,510.
  - Other items, net: -234 -253 -253 -328 -298 -237 -183 -236 -170 -65 -110 -125.
- Broad money (M2, CFA billion): 1,972 1,767 1,997 1,695 1,607 1,565 1,647 1,823 1,995 2,239 2,314 2,377.
  - Currency outside banks: 511 470 531 445 408 404 421 478 523 587 607 623.
  - Demand deposits: 1,109 987 1,116 973 894 865 872 1,046 1,145 1,285 1,328 1,364.
  - Time deposits: 352 309 349 278 304 296 320 298 327 366 379 389.
- Broad money annual growth rates (percent): -15.4 -10 13.0 -4.0 -5.2 -7.7 -2.9 7.5 9.4 12.2 3.4 2.7.
- Memorandum: Gross imputed official reserves (CFA billion): 519 277 600 291 274 281 347 458 755 1,053 1,174 1,233; In months of imports: 1.8 0.8 4 2.1 0.9 ... 3.7.

Note: 1/ Private sector and public enterprises.

### Gross financing needs (Table 6, U.S. dollars)
- Financing needs (US$ billion): 7.96 5.43 7.27 7.36 7.84 7.66 7.52 7.09 6.51 30.11 (2019-22).
- External current account deficit excl. grants and oil exports: 7.55 4.99 6.34 6.75 6.69 6.63 6.80 6.47 6.12 26.59.
- Amortization on external debt: 0.42 0.44 0.93 0.61 1.15 1.03 0.73 0.61 0.39 3.52.
- Financing (components, US$ billion): 6.51 5.06 6.91 7.40 7.50 7.46 7.62 7.18 6.68 29.77.
  - Oil exports (as financing): 3.12 4.91 6.87 8.00 7.75 7.67 7.45 6.78 6.39 29.65.
  - Foreign Direct and portfolio Investment: 2.93 0.33 2.14 0.34 0.46 0.48 0.48 0.53 0.56 1.96.
  - External borrowing (drawings): 0.86 0.73 0.20 0.08 0.21 0.20 0.20 0.18 0.18 0.79.
  - Change in net official reserves (accumulation = ─): 1.48 0.367 -0.61 -0.04 -0.29 -0.52 -0.53 -0.22 -0.11 -1.56.
- Financing Gap: 0.0 0.0 1.0 0.0 0.0 0.63 0.73 0.43 0.12 -0.06 1.91.
- Targeted level of gross imputed official reserves (US$ billion): 0.88 0.48 1.13 0.52 0.80 1.33 1.87 2.09 2.21; in months of imports: 1.8 0.8 2.1 0.9 1.3 2.2 3.1 3.5 3.7.

### Banking sector financial soundness indicators (Table 7)
(Percent, unless otherwise indicated; years 2015–2018 October)
- Regulatory capital to risk-weighted assets: 19.5; 19.1; 22.8; 27.6.
- Non-performing loans less provisions to regulatory capital: 4.6; 7.9; 33.0; 39.2.
- Non-performing loans (gross) to total loans (gross): 3.6; 4.8; 13.3; 17.6.
- Return on equity: 20.4; 28.0; 9.9; -.
- Return on assets: 2.3; 4.0; 1.7; -.
- Ratio of liquid assets to short-term liabilities: 116.1; 104.4; 146.6; 167.4.
- Total deposits to total (noninterbank) loans: 125.5; 102.8; 90.5; 90.9.
- Gross loans (banks' book) - bn FCFA: 1,424.1; 1,459.8; 1,400.6; 1,315.1.
- Gross loan - annualized growth rate: 19.8; 2.5; -4.1; -9.5.

Notes: 1) Current year profits excluded from regulatory capital; 2) risk weights specified.

### Public debt stock (Table 8) — selected items
- Total public debt (multiple entries across years, CFAF billion / USD million / percent of GDP):
  - 5205 ; 8631 ; 102.9
  - 5473 ; 8796 ; 118.6
  - 6096 ; 11000 ; 117.5
  - 5689 ; 9871 ; 87.8
  - 5580 ; 9486 ; 85.5
- External debt and arrears:
  - External debt totals and debt service components presented; of which: arrears figures across years (e.g., 3786277.5 4367019.4 4538178.7 5209028.0 5359098.2).
- Major creditors and components listed: Multilateral and other creditors, Official bilateral (Paris Club, France, China, etc.), Private creditors, Oil-prepurchased debt, Glencore, Trafigura, Orion, Suppliers.
- Domestic debt components: BEAC advances; Domestic bond; BSCA; ARC; SGEC CONGO; ENI; Audited arrears in CCA; Unaudited arrears.

Memorandum items:
- Additional debt claimed by commisimpex: 48678210.5; 486844; 7.5.
- Rejected claims: 1573252834.1; 8261490; 15.9; 4157206.4; 4157056.4.

### External arrears (Table 9) — headline
- Total external arrears (CFAF Billion; pct of GDP across years): series include 159.9; 218.1; 377.9; 7.5; 215.6; 220.4; 436.0; 9.4; 227.4; 225.6; 453.0; 8.7; 324.9; 195.0; 519.9; 8.0; 337.9; 196.7; 534.6; 8.3.
- Composition by creditor type: Multilateral and other creditors (near zero entries); Bilateral (Paris Club and Non-Paris Club) and Private creditors have substantial shares; Suppliers and oil traders noted in series.

Notes: End-2015 stocks are unrestructured pre-HIPC arrears; China Machinery Engineering Corporation classification noted; decline in 2017 reflects cancellation of arrears owed to two private creditors due to court arbitrations.

### IMF program: disbursement schedule and repayment capacity
- Proposed schedule of disbursements and timing under ECF arrangement, 2019–22 (Table 10):
  - ECF Board approval: Executive Board Approval of Three-year arrangement under the ECF: 32.4 ; 20.0 (percent of quota).
  - December 15, 2019: Observance of performance criteria for June 30, 2019 and completion of first review: 32.4 ; 20.0.
  - June 15, 2020: Observance of performance criteria for December 31, 2019 and completion of second review: 48.6 ; 30.0.
  - Subsequent semiannual disbursements listed with identical percent shares, total: 324.0 ; 200.0 (Amount (SDR million)).
  - Memorandum item: Republic of Congo's quota: 162.0.
- Indicators of capacity to repay the Fund (Table 11, Millions of SDRs and ratios):
  - IMF obligations based on existing credit — Principal: 0.85; 0.97; 0.60; 0.00; 0.00...
  - Charges and interest: 0.16; 0.32; 0.32; 0.32; 0.32...
  - IMF obligations based on prospective credit — Principal includes future spikes: 17.8; 37.3; 58.3; 64.8; 64.8; 47.0; 27.5.
  - Total obligations based on existing and prospective credit (SDR millions): 0.85; 0.97; 0.60; 0.00; 0.00; 17.8; 37.2; 58.3; 264.8; 64.8; 46.9; 27.5.
  - Outstanding IMF credit based on existing and prospective drawings (SDR millions): 66.4; 162.6; 259.2; 324.0; 324.0; 306.2; 268.9; 210.6; 145.8; 81.0; 34.0; 6.5.
  - Ratios (percent of exports of goods and services; percent of debt service; percent of GDP; percent of tax revenue; percent of quota) provided for the series above.

Memorandum items:
- Exports of goods and services (CFAF billions): 5,421; 5,343; 5,208; 4,841; 4,719; 4,697; 4,565; 4,362; 4,141; 4,016; 3,845; 3,712; 3,701.
- External Debt service (CFAF billions): 758; 665; 486; 409; 273; 160; 175; 198; 223; 210; 215; 211; 215.
- Nominal GDP (CFAF billions) series provided (e.g., 6,529; 6,578; 6,611; 6,432; 6,449; ... up to 8,063).
- Tax revenue (CFAF billions) series: 746; 867; 929; 1,029; 1,111; 1,208; 1,316; 1,435; 1,565; 1,706; 1,860; 2,027; 2,203.

### Quantitative performance criteria and indicative targets (Table 12)
- Type and selected targets (Billions of CFA francs, cumulative from the beginning of the year):
  - Floor on basic non-oil primary budget balance (PC): -125 -220 -413 -34 -116.
  - Ceiling on net domestic financing to the central government (PC): -48 -133 -315; -201 -257.
  - Ceiling on the accumulation of new external payment arrears on public and publicly guaranteed external debt (PC): 00000 (set to zero continuously).
  - Ceiling on contracting or guaranteeing of new non-concessional external debt by the central government (US$ million) (PC): 000 00.
  - Floor on non-oil revenues (IT): 330 524 763 207 386.
  - Floor for poverty-reducing social spending (includes arrears) (IT): 162 302 380 68 136.
  - Limit on disbursements of external loans for investment projects (IT): 3077 1220 28.
  - Ceiling on new concessional external debt contracted or guaranteed by the central government (IT): 4288 1143 162.
- Memo items:
  - Repayment of domestic arrears: 0 35 176 4284.
  - Receipts from fuel taxes: 13424.
  - Oil revenue: 7; 391655903187363 (series).
  - Receipts from privatization: 008.7; 5.5 5.5.
  - Expected external budgetary assistance, net: 045362172264.
    - Budgetary loans and grants, including IMF loan: 0262709393.
    - Relief from debt restructuring: 0199279171.
    - Change in non-Program external arrears: 0 0000.
    - Payments for current external debt service due after debt relief: 17826735658117.

Notes: Performance Criteria and Indicative Targets are defined in the TMU; definitions and exclusions specified in accompanying footnotes.

### Structural reforms, prior actions, and benchmarks (Tables 13–14)
- Prior Actions (before July 2018) implemented include:
  - Adoption by the government of a 2018 budget in line with the program parameters (Done on Dec. 27, 2017).
  - Publication of a government-approved diagnostic study on governance and corruption issues (Done on June 19, 2018).
  - Submission to Parliament of amendments to the law establishing the SNPC to make obligatory annual publication of audited financial statements (Done on June 18, 2018).
- Previous structural measures implemented (selected):
  - Publication of oil production-sharing contracts prevailing at end-2017 and SNPC’s audited financial statements for 2012–17 (End-November 2018 — Implemented).
  - Publish monthly economic monitoring tables on ministry and statistics institute websites (Continuous from end-December 2018 — Implemented).
  - Fiscal safeguards review completed (End-August 2018 — Implemented).
  - Enact anti-corruption law establishing Independent Anti-Corruption Commission with investigative powers (February 2019 — Implemented).
  - Enact law establishing the Commission on Transparency (February 2019 — Implemented).
  - Adopt law implementing constitutional obligation to declare assets (February 2019 — Implemented, with amendments may be necessary).
  - Complete audit of domestic debt and adopt repayment schedule; adopt draft manual on debt procedures by National Public Debt Committee (April 2019 — Implemented).
  - Submission to Parliament of reports on SNPC pre-financing contracts, Ministry of Public Works projects 2014–2017, ongoing “special agreements”, KPMG oil reconciliation reports and concession tables — all Prior Actions and Implemented.
- Proposed Structural Benchmarks (Table 14) and target dates:
  - Complete the new audit of domestic debt (including budget exercises of 2017 and 2018; all arrears of the General Direction of Public Works) — Target: October 2019.
  - Adopt a privatization strategy to support program financing assurances — Target: End-September 2019.
  - Approve a revised domestic fuel price structure with higher taxes and automatic adjustment mechanism — Target: End-October 2019.
  - Scale up the Lisungi cash transfer as described in paragraph 31 of the MEFP — Target: End-December 2019.
  - Adopt implementing decrees of the Law establishing the anti-corruption commission — Target: End-September 2019.
  - Adopt implementing decrees of the Law establishing the Transparency Commission — Target: End-September 2019.
  - In consultation with Fund staff, submit to Parliament an amendment to the anti-corruption law to ensure full compliance with the UNCAC — Target: End-March 2020.
  - Certification by the Ministry of Finance that all laws, contracts or agreements granting exemptions from foreign exchange regulations to oil operators have been transmitted to the BEAC — Target: End-September 2019.

*Sources: Congolese authorities; BEAC; and IMF staff estimates and projections.*

### Annex I. Restructuring Debt to Achieve Sustainability

### Annex I. Restructuring Debt to Achieve Sustainability

### Overview and objective
- Purpose: Describe the role of debt restructuring in restoring the sustainability of public finances in the Republic of Congo by bringing all debt indicators below their respective policy dependent thresholds by 2023.
- Status: Despite a recent debt restructuring agreement with China, the Republic of Congo remains in debt distress according to the debt sustainability analysis (DSA supplement).

### Key solvency and liquidity findings
- Debt service burden:
  - Debt service on existing debt will average $1.5 billion (about 12.5 percent of GDP) between 2019 and 2022.
  - A large part of debt service is directed toward debt service to oil traders.
- Baseline DSA outcomes:
  - The PV of external debt-to-GDP ratio remains well above its threshold between 2019 and 2030 under the baseline scenario.
  - The debt service-to-revenue ratio breaches its threshold by a large margin until 2022.
- Target outcomes under the authorities’ proposed restructuring:
  - The proposed restructuring brings the PV of external debt below 30 percent of GDP by 2023, resolving breaches on all other external debt indicators.
  - The strategy succeeds in bringing the PV of total public debt below 35 percent of GDP by 2025.

### Authorities’ restructuring strategy and parameters
- Scope and exclusions:
  - Strategy focuses on commercial creditors and excludes bilateral official creditors, multilateral organizations, the existing Eurobond, and other restructured pre-HIPC claims.
  - Government rationale: official creditors provided support via the HIPC initiative or the agreement with China; preserving market access requires leaving the Eurobond outside restructuring.
- Expected impacts:
  - Staff calculations indicate a substantial reduction in the nominal stock of external commercial debt is required to reach a moderate risk of debt distress by 2023.
  - Comparison of cash flows under restructuring and baseline scenarios shows materially lower external debt service after restructuring (see Figures referenced in source).
- Financing plan (selected items from authorities’ projections):
  - Exceptional financing from debt restructuring (2019–22 totals shown in source figures and tables).
  - New external financing and contributions from World Bank, African Development Bank, France, IMF included in authorities’ financing plans (see source tables for exact breakdowns).

### Domestic debt considerations
- Exclusions and audits:
  - Eligible domestic debt for restructuring will exclude BEAC advances and domestic bonds.
  - Authorities will initiate another audit of domestic arrears accumulated over 2017–18 and adopt a repayment plan consistent with program financing assurances (structural benchmark for end-September 2019).
- Restructuring terms and financial-sector risks:
  - Restructuring general terms for eligible domestic debt could be more favorable than those for eligible external debt because of adverse impacts on growth and banking-sector stability (Annex IV referenced).
  - The authorities plan to restructure eligible domestic debt while limiting negative spillovers to the banking sector.

### Contingent liabilities, litigation claims, and escrow buffers
- Main contingent liabilities identified:
  - Additional claims under litigation: US$844 million.
  - Domestic private contractors’ claims rejected by the authorities after internal review: US$720 million.
- Assumptions and mitigation:
  - Staff assume the authorities settle some litigated debt and that the audit of domestic debt validates 10 percent of the claims rejected by the authorities.
  - Government deposits projections include a buffer to repay debt service on these amounts if the risk materializes.
- Escrow account amounts (Table 2b from source; amounts in Billions of CFA francs):
  - 2019: 539
  - 2020: 440
  - 2021: 454
  - 2022: 385
  - Breakdown (2019–22 totals shown in source):
    - External creditors: 356 / 233 / 234 / 213 (by year)
    - Domestic creditors: 143 / 169 / 184 / 137 (by year)
    - Restructured contingent liabilities: 39 / 38 / 37 / 35 (by year)

### Managing oil revenue volatility (Box 1)
- Rationale: Oil price and production volatility materially affect debt sustainability; state-contingent clauses can help manage downside and upside volatility.
- Proposed design features:
  - Link debt relief or debt-service adjustments to a state variable: the share of oil revenue that accrues to the government (derived from production-sharing agreements and valued at international oil prices, adjusted for Congo’s oil quality).
  - Use mechanisms that tie actual debt relief provided in each period to realized government oil revenues.
  - Prefer operationally feasible features: downside protection via floater-type adjustments to debt service is more readily operationalized than continuous revision of debt stock (linker feature).
  - Reference instruments: “linker” and “floater” features as described in the State-Contingent Debt Instruments for Sovereigns (SCDIS) note (G20, 2017).
- Implementation notes:
  - Data integrity risks are reduced because oil production can be independently verified and international oil prices are hard to manipulate.
  - Authorities and debt advisors are working out the details of these mechanisms.

### External stability assessment — exchange rate and current account
- Overall assessment of REER:
  - Taking into account multiple methodologies and Congo’s status as an oil producer, staff assesses the exchange rate to be overvalued by 15–20 percent.
- Current account developments:
  - Improvement drivers:
    - Ramp-up in oil production from a new offshore field (Moho Nord) and higher oil prices since 2016.
    - Non-oil trade deficit narrowed because of import compression linked to weaker growth and fiscal adjustment.
  - Current account result: moved from an average deficit of 50 percent of GDP over 2015–16 to a surplus of 6.7 percent in 2018.
- Oil production and projection details:
  - Oil production projected to peak at 140 million barrels in both 2019 and 2020.
  - Absent new discoveries, oil production is projected to decline by an average of 5 percent between 2020 and 2039.
- EBA-lite and alternative assessments (selected numeric outcomes):
  - Revised EBA-lite current account model result: exchange rate undervaluation of around 21 percent (contrasts with a 15 percent overvaluation obtained in July 2018).
  - Revised index REER EBA-lite approach: implied REER overvaluation of about 15.5 percent (Ln(REER) Actual 4.62; Ln(REER) Norm 4.46; Residual 0.17).
  - Consumption allocation (Bems and de Carvalho Filho approach) outcome:
    - Assumptions include proven oil reserves of 1.6 billion of barrels and staff-assumed 9 percent return on investments.
    - Under these assumptions, the constant real annuity rule implies a current account norm around 16 percent of GDP over the medium term, suggesting a 33 percent overvaluation relative to current projections.
- Policy implications:
  - Policy adjustment is needed to close external gaps; specifically, adjustment of the non-oil primary balance as projected under the program.
  - Structural competitiveness improvements are needed through better business environment outcomes to support private sector development and diversification.
  - Republic of Congo’s Doing Business 2019 outcomes: some reforms (enforcing contracts, property registration) but performance remains slightly below CEMAC averages and substantially below SSA averages.

*Source: Annex I. Restructuring Debt to Achieve Sustainability (excerpted IMF staff document).*

### References

### Annex III. Fiscal Multipliers and Sources of Non-Oil Growth

### Introduction
- Further fiscal consolidation is required to restore long-term sustainability.
- The note estimates that most of the contractionary effects of fiscal consolidation initiated since 2015 has already taken place.
- Non-oil GDP growth is expected to recover to 1 percent.
- Shifting drivers of non-oil growth from factor accumulation to total factor productivity (TFP) could help offset some effects of fiscal consolidation and improve potential growth through structural reforms to:
  - enhance the efficiency of capital;
  - improve governance and the business climate.

### Fiscal multipliers: concept and determinants
- Fiscal multiplier: impact of discretionary change in public spending and/or taxes on output.
- Multipliers tend to be larger when:
  - there is less leakage through savings or imports;
  - automatic stabilizers have limited scope during downswings;
  - exchange rate regime is fixed (Batini et al., 2014).
- Empirical studies for low-income and SSA countries indicate multipliers are smaller than in advanced economies (IMF, 2017).

### Fiscal multipliers in the Republic of Congo — empirical evidence
- No prior empirical estimates existed for Congo; this paper constructs statistical measures, applies the IMF Bucket Approach (Batini et al., 2014), and uses econometric techniques (OLS and IV).
- Statistical measures (ratio-based) — average absolute value over 2004–18:
  - estimated at 0.2 overall;
  - increased to 0.4 after 2014 (Table 1).
- IMF Fiscal Affairs Department Bucket Approach (IMF BA):
  - Congo is assigned to the low bucket (0.1 to 0.3).
  - After scaling for structural and cyclical factors, multiplier estimated between 0.15 and 0.45.
- Asymmetry over the cycle:
  - Statistical measure for recessions estimated at 0.3 and for expansions at 0.10.
  - BA-derived ranges: (0.15–0.45) for downswings and (0.09–0.26) for upswings.
- Empirical regression estimates (2000–17):
  - OLS results suggest multipliers in the range (0.13, 0.20).
  - IV estimates range between 0.19 and 0.28.
  - Selected fiscal multiplier for scenario analysis: 0.32 for recessions and 0.23 for expansions.
- Comparative benchmark:
  - IMF (2017) estimates that an increase in the cyclically adjusted primary balance by 1 percentage point of GDP leads to an output decrease by 0.3 percent on impact and by 0.4 percent over a three-year horizon.
- Governance and corruption implications:
  - Weak governance and corruption may partly explain lower fiscal multipliers via bloated spending and misallocation (e.g., “white elephants”).
  - Weak public investment management and poor implementation capacity reduce the productivity of public investment.

### Quantitative regression and statistical results (selected)
- Regression period: 2000–17; dependent variable: non-oil growth.
- Reported R-squared and observations:
  - Observations: 15 (for each reported specification).
  - R-squared: 0.235, 0.288, 0.288, 0.198 across specifications.
  - R-squared adjusted: 0.107, 0.094, 0.159, -0.042.
- Instrumental variables used: lagged variables of non-oil growth, oil growth, and change in the non-oil primary balance.
- Reported significance: * p<0.01 ** p<0.05 *** p<0.1.
- Reported standard errors are robust and estimated using the Newey-West HAC method.

### Projected output effects of fiscal consolidation (2016–19)
- Baseline assumptions:
  - Non-oil potential output growth kept at a constant rate of 2.8 percent starting in 2016 (lower than 3.7 percent average during 2013–15).
  - Past fiscal shocks are assumed overlapping given persistence of multiplier effects.
- Fiscal shock measure: change in the cyclically adjusted non-oil primary balance.
  - Expected adjustment from 5 to 2 percent of non-oil GDP between 2018 and 2019.
- Outcome:
  - This fiscal consolidation, accompanied by a rebound in public investment, is estimated to lead to a recovery in non-oil growth by 1 percent for 2019 (Figure 1).
- Complementary finding:
  - Melina et al. (2019) show growth gains from anti-corruption reforms could range between 0.8 to 1.8 percent per year over the next 10 years.

### Sources of Non-oil Growth — overview
- Oil sector context:
  - Congo is the third largest oil producer in sub-Saharan Africa.
  - Oil sector represented 40–60 percent of GDP over 1990–18.
- Non-oil sector:
  - Grew by less than 3 percent per annum during 1991–2018 and has been the main driver of overall growth.
  - Non-oil growth remains a bit below other CEMAC countries except CAR.
  - Bhattacharya and Ghura (2006) find no empirical evidence of direct spillover effects from oil prices to non-oil growth in Congo; political instability has negatively affected non-oil growth.

### Supply-side decomposition (sector contributions)
- Infrastructure sectors (construction and public works, transport and communication, utilities):
  - Together accounted for one quarter of non-oil growth (Figure 5).
  - Transport and communications alone accounted for one fifth of non-oil growth.
  - Share of these sectors expanded from 17 percent in the early 1990s to 27 percent in 2015 (Figure 6).
  - Expansion driven by massive public infrastructure spending; these sectors contracted significantly with spending cuts in 2015–18.
- Industry and mines:
  - Includes mineral resources (copper, iron, phosphate potassium, manganese, nickel-cobalt, gold).
  - Grew by 3.7 percent per annum on average but contribution turned negative since 2015.
- Agriculture and forestry:
  - Agricultural land accounts for a third of total land area; only 2 percent of 10 million hectares of arable land exploited.
  - Agriculture grew by 3.7 percent per annum between 1990 and 2018 and accounted for 12 percent of non-oil GDP.
  - Forests account for 65 percent of land and cover over 22 million hectares; forestry declined from 4 to less than 2 percent of non-oil GDP between 1990 and 2017.

### Demand-side decomposition
- Non-oil growth driven by domestic demand:
  - Consumption and investment were major drivers between 1991–2018 (Figures 7 and 8).
  - Non-oil investments rose to almost 50 percent of non-oil GDP in 2004–14, driven by public investments.
  - Net non-oil exports’ negative contribution turned positive in 2015–18 reflecting compressed demand for imports.

### Decomposition by factors of production — methodology and findings
- Growth accounting framework:
  - Assumes a constant-returns to scale Cobb-Douglas production function with perfect competition (Solow, 1957): Y = A K^α L^(1−α), where A is TFP.
  - Output measured by non-oil GDP at constant prices in local currency units.
  - Human capital proxied by labor force growth (World Bank WDI database).
  - Initial capital stock estimated using the perpetual inventory method with:
    - constant depreciation rate of 6 percent;
    - capital-output ratio of 1.5 (as in Bhattacharya and Ghura, 2004).
  - Capital share α = 0.4 (Senhadji, 2000 for sub-Saharan Africa).
- Historical conclusion:
  - Previous work concluded factor accumulation was the main source of growth while TFP contribution was limited.

### Policy implications and recommendations
- Most of the contractionary effects of fiscal consolidation since 2015 have likely already occurred; a modest recovery in non-oil growth is expected.
- To offset fiscal consolidation effects and raise potential growth, policy priorities include:
  - Structural reforms to shift growth drivers from factor accumulation to TFP;
  - Enhance efficiency of capital allocation and public investment management;
  - Improve governance and the business climate, and pursue anti-corruption reforms (potential growth gains of 0.8 to 1.8 percent per year per Melina et al. (2019)).

*Prepared by Hoda Selim and Abdoul Aziz Wane (AFR).*

### 18. There are limitations to this exercise. A key weakness relates to the interpretation of TFP

### 1cogea2019001 - 18. There are limitations to this exercise. A key weakness relates to the interpretation of TFP

### Limitations of the exercise and data assumptions
- TFP measures residual growth and "can capture gains in economic efficiency but also other factors including political disturbances and conflicts, institutional changes, changes in government policies, supply shocks and measurement errors."
- Non-oil national accounts time-series are of poor quality in Congo; series were constructed using assumptions on the initial non-oil capital stock and its evolution over time.
- Key modeling assumptions:
  - Since the first oil field in Congo (Pointe Indienne) came on stream in 1973, the non-oil capital stock is assumed equal to the full capital stock until 1972.
  - Starting 1973 and until 1989, non-oil fixed capital formation is assumed to decline by 5 percent per annum to reach 20 percent of total investments in 1990 (figure derived from Congo’s national accounts).
  - Starting 1990, non-oil fixed capital formation is calculated as the sum of non-oil private and public investments.
  - Non-oil public investment is assumed to account for 50 percent of total public investments.
- Public capital stock calculation (as presented):
  - 퐾퐾푡 = (1−훿훿푡) 퐾퐾푡−1 + �1−훿훿푡2� 퐼퐼푡−1, where 퐾퐾푡 is the stock of public capital at time t; 훿훿푡 is a time–varying depreciation rate; 퐼퐼푡−1 is public investment spending at time t-1.
- Conclusion: "Hence, the results need to be viewed as indicative."

### Historical non-oil growth and role of TFP
- For the past 3 decades, non-oil growth was driven by factor accumulation (first labor then capital).
- TFP contribution:
  - Overall TFP contribution was negative at -1 percent per year (over the long run described).
  - Contribution of TFP rose to 0.8 percent during 2004–14.
  - During 2015–18, the contribution of TFP to growth turned negative.
- Capital and investment dynamics:
  - With close to 10 percent average growth over 2004–14, the capital stock in the non-oil sector almost tripled and accounted for more than half of overall non-oil growth, driven by record public investment rates.
- Drivers of negative TFP contribution in 2015–18: "possibly reflecting the impact of worsening governance indicators and low investment efficiency."
- Sustainability concern: "This pattern of growth relying on ever higher investment rates is not sustainable in a low oil price environment, given the required increases in debt to finance investment."

### Potential for higher TFP growth under program policies
- Forecast basis:
  - Forecast of TFP growth uses fiscal multiplier estimates and public investment rates consistent with the program’s fiscal adjustment.
  - Human capital estimate uses a labor force growth of 2.5 percent and assumes no significant changes in social policies and outcomes.
- Projected path:
  - "With these assumptions, the negative contribution of TFP growth would start improving in 2019 and recover to positive levels by 2020."
- Enabling factors stated: "unleashing growth potential in critical sectors thanks to the program’s structural reform focus on access to credit, good infrastructure, better governance, a skilled workforce, and an effective social safety net."

### Reforms recommended to raise TFP
- The reforms listed include:
  - (i) Upgrading learning outcomes and the ability of the labor force to learn new skills through vocational training and improved insertion of women and youth.
  - (ii) Expanding access to quality maternal and child health care services; enhancing the efficiency of public investment.
  - (iii) Improving governance and reducing corruption.
  - (iv) Addressing the debt overhang.

### Sovereign-bank linkages, domestic debt restructuring, and financial stability — context and risk
- Macro context and debt stance:
  - Congo’s total debt is "estimated at 88 percent of GDP at end-2018" and described as unsustainable.
  - Authorities’ restructuring objective: (i) bring external debt to levels required for a moderate risk rating by 2023, and (ii) ensure financing needs, including external and domestic debt service, can be met.
- Risks from restructuring:
  - A partial write-off of sovereign assets held by banks can lead to banking sector insolvency.
  - Debt write-offs risk undermining depositors’ confidence and triggering a liquidity crisis.
  - Empirical evidence cited: sovereign debt crises often occur with currency and/or banking crises.
- Banking sector snapshot and vulnerabilities:
  - As of December 2018, there are 11 commercial banks in Congo with assets amounting to CFAF 1928 billion (USD 3.47 billion or 30 percent of GDP).
  - The banking sector shows signs of stress since 2014: liquidity tensions and rapid accumulation of NPLs, though NPLs remain below the CEMAC average.
  - Solvency ratio (total capital / risk weighted assets) improved from 12–14 percent in 2014 to 25 percent in 2018.
  - Regulatory minimum solvency requirement is 7.5 percent in 2018.
  - Improved solvency initially reflected an 80 percent capital increase in the largest Congolese bank and the creation of a new joint-venture bank; later improvement reflected deterioration in the quality of banks’ capital which reduced their risk-weighted assets.
  - Fewer than half of institutions comply with all norms issued by the Central African Banking Commission (COBAC).
  - Four institutions are experiencing significant difficulties regarding minimum capital requirements; two do not respect the solvency criterion. One small non-systemic bank (less than 4 percent of market share) is not solvent; another non-systemic bank is in distress but complies with solvency norms.
- Purpose of the note: "to inform the authorities’ domestic debt restructuring strategy" by examining macro-financial links triggered by the oil price shock and testing restructuring scenarios for bank solvency and liquidity.

### Key macro-financial linkages and transmission channels observed
- Direct exposure:
  - The oil sector is not a major driver of credit growth: oil accounted for 49 percent of GDP between 2014 and 2018, but credit extended to extractive industries accounted for only 5 percent of total credit.
- Channels and impacts of oil price decline:
  - Lower oil prices reduced foreign assets: banks drew on foreign assets which "fell by two-thirds in 2014" but have stabilized since.
  - Lower oil fiscal revenues and cash constraints led to spending cuts and deterioration in bank liquidity:
    - Public capital spending fell "by more than 90 percent since 2014."
    - Government deposits at the regional central bank (BEAC) declined from "close to CFAF 800 billion in September 2014 to CFAF 64 billion in end 2018."
    - Banks’ deposits cumulatively declined "by more than 700 billion CFAF (around a third) since end-2014," which is almost twice the loss in the CEMAC banking sector.
  - Bank liquidity shortages suppressed credit: credit to the private sector contracted, especially in non-oil and government-dependent sectors.
- Indirect sovereign-bank linkages (through arrears and private-sector exposure):
  - Sovereign debt holdings by banks at end-2018: CFAF 237.6 billion, accounting for 12 percent of the banking sector assets (vs. 15 percent average in CEMAC).
  - Government securities (Treasury bills and regional bonds) held: CFAF 91.3 billion (4.7 percent of assets), though half of this amount relates to debt issued by other governments in the CEMAC zone.
  - Net claims on government to banks account for "than 3 percent of assets."
  - Domestic debt stock increase to 27 percent of GDP in 2018 was driven by a large accumulation of arrears estimated at CFAF 986 billion (15 percent of GDP).
  - Composition of arrears:
    - Social arrears: 3.4 percent of GDP.
    - Audited commercial arrears accumulated over 2014–16 (amount not separately quantified here).
    - Unaudited arrears amounting to FCAF 626 billion, of which CFAF 506 billion to government suppliers (7.8 percent of GDP).
  - Association with banks’ loans in arrears:
    - Banks’ loans in arrears rose from CFAF 33 billion in September 2014 to CFAF 287 billion at end-2018.
    - The nine-fold increase in banks’ loans in arrears was driven by private-sector borrowers, especially in sectors awarded government contracts: utilities, transport, and construction/public works.
  - Non-provisioned and unpaid credits "have soared" (chart evidence in source).

### Stress-test implications and policy takeaway (as emphasized)
- Domestic debt restructuring design should be tailored to mitigate destabilizing effects on the financial sector.
- Indicative stress tests show:
  - To maintain banking sector solvency, restructuring should avoid large haircuts on sovereign debt held by financial institutions and on non-provisioned claims on banks’ balance sheets.
  - Debt write-offs risk undermining depositor confidence and triggering liquidity crises.
- Broader policy implication: restructuring that preserves banking sector stability (minimizing large haircuts to bank-held sovereign instruments and protecting liquidity) is critical to avoid amplifying output losses via banking distress.

*Source: IMF staff estimates and analysis contained in the supplied content unit.*

### 9. Risks stem from provisioned

### 9. Risks stem from provisioned

### Risks from loans in arrears and provisioning
- Private sector claims have increased considerably since 2014.
- Banks’ balance sheets carry loans in arrears amounting to 15 percent of the sector’s assets.
- Around 75 percent of these loans in arrears is owed by the private sector and account for 11 percent of the sector’s assets.
- An amount of CFAF 165.6 billion of banks’ loans in arrears (13.6 percent of gross credit) are non-provisioned for, up from 15 billion in September 2014 (1.4 percent of total credit).
- These non-provisioned loans—representing over half of the stock of banks’ loans in arrears—are mainly comprised of immobilized and unpaid claims, which exploded since September 2014.
  - Immobilized claims are defined as outstanding loans for more than 90 days owed by the government or guaranteed by the government.
  - Unpaid claims are overdue loans for less than 90 days.
- Congo’s immobilized claims are higher than the CEMAC average though NPLs remain lower than the regional average.
- These poor-quality assets on banks’ balance sheets reinforce indirect sovereign–banks links and undermine the soundness of the banking sector.
- Provisioning for such debt by banks is not compulsory (Article 18).

### Restructuring of sovereign domestic debt and bank stability risks — stress test results
- Preliminary parameters of the authorities’ debt restructuring strategy were tested for compatibility with financial stability.
- Under the authorities’ strategy the authorities intend to exclude sovereign debt held by domestic financial institutions, prioritize the repayment of social arrears and will refrain from accumulating new domestic arrears.
- The stress test is built under the following assumptions:
  - (i) a 20 percent write-off on non-provisioned overdue loans,
  - (iii ) a 20 percent write-off on non-provisioned immobilized claims, and
  - (iv) a 75 percent write-off on provisioned NPLs.
  - Further assumptions: banks do not make profits and the BEAC would increase its policy rate by 150 bps.
- Under these assumptions, the bank stress would reduce the solvency ratio from 24.9 percent to 19 percent, which is above the minimum requirement ratio of 9.5 percent in 2018.
- A severe bank stress test assumes:
  - (i) a 50 percent write-off on sovereign debt held by banks,
  - (ii) a 75 percent write-off on existing non-provisioned overdue loans,
  - (iii ) a 75 percent write-off on non-provisioned immobilized claims resulting from the waiver of the State guarantee on those claims, and
  - (iv) a complete write-off of NPLs.
  - In addition, it is assumed that the government would continue to accumulate domestic debt arrears.
- Under the severe scenario:
  - The banking sector’s solvency ratio would fall to 6 percent, which would be slightly above the regulatory requirement of 9.5 percent.
  - The capital of seven banks—accounting for more than half of the sector’s assets—would become insolvent.
  - These banks would require a recapitalization of 1.6 percent GDP.
  - The write-offs of immobilized claims and the continued accumulation of domestic arrears have the most detrimental effects on banking solvency.
  - If 50 percent of recognized domestic arrears are repaid in one year, and if firms use 10 percent of this amount to reimburse overdue loans to banks, a third of the write-off-induced losses could be offset.
- The results of these stress tests are indicative and should be viewed as such.

### Liquidity risks from restructuring
- The restructuring may trigger a liquidity crisis if it undermines depositors’ confidence.
- Against the backdrop of shallow liquidity, debt write-offs and deterioration in banks' asset quality can undermine depositors’ confidence and trigger a liquidity crisis.
- Stress tests show deposit outflow impacts on the liquid assets to short-term liabilities ratio:
  - A fall in deposits by more than 30 percent would reduce liquidity (measured by the liquid assets to short term liabilities ratio) to below 100 percent.
  - A fall in deposits by 40 percent would reduce this ratio to 58 percent.

### Policy recommendations to safeguard financial stability during restructuring
- Financial stability considerations should be explicitly taken into account during the design of the restructuring strategy.
  - Examples: Cyprus and Jamaica where choices about debt preserved financial stability.
  - Factors that helped safeguard banking stability in those cases included: (i) financial stability considerations were explicitly taken into account in the design of reprofiling, (ii ) bank holdings of sovereign debt were not large, (iii ) capital and liquidity support mechanisms were present, including the creation of a financial sector stability fund.
- Some categories of domestic debt can be excluded from the restructuring.
  - Excluding sovereign debt held by financial institutions, including government securities, can safeguard financial stability.
  - Exclusion of debt with very short original maturity, such as treasury bills (T-bills), can help maintain financial system liquidity.
- The restructuring strategy should safeguard domestic creditors from large haircuts.
  - If action is taken early enough and compatible with debt sustainability, debt reprofiling for a liquidity-constrained country would smooth repayments or shift them to a period when capacity to pay is expected to be greater.
  - Preemptive reprofiling tends to have less disruptive effects on the banking sector if it improves the prospects of debt sustainability.
- Banks’ immobilized claims should be adequately addressed in the arrears’ restructuring strategy.
  - After stocktaking and audit, devise a credible plan for clearing the outstanding stock with a public timetable.
  - Criteria for prioritizing arrears’ clearance should be transparent and adhered to.
  - The clearance plan should ensure repayment of arrears enables firms to repay overdue loans to creditor banks to limit further losses and strengthen banks’ capital.
  - Sound execution of the arrears’ plan can reassure markets that debt write-offs are part of a well-controlled process that will guarantee the viability of banks.
- Ensure BEAC can provide liquidity in case of a liquidity crisis.
  - BEAC can provide lending against collateral through the emergency lending facility.
  - If banks use sovereign debt as collateral, increased sovereign risk from restructuring may reduce the eligibility of Congo’s sovereign assets as acceptable collateral.
  - Reduced banks’ access to BEAC financing would reduce the liquidity ratio of the entire system by 5–10 percent.
  - A possible solution would be to introduce a temporary expansion of eligible collateral.
- Strengthen implementation of new COBAC regulations including for banks in distress.
  - COBAC has adopted an action plan to address rising NPLs (including clarifying and better enforcing provisioning rules), strengthen implementation of specific supervision rules (including risk concentration and connected party lending rules), and resolve banks in difficulty.
  - National authorities should coordinate with COBAC to enforce prudential norms and provisioning for NPLs.
  - Improvements are required in financial monitoring through enhanced financial reporting and staff capacity in line with FSAP recommendations.
  - Non-solvent, non-systemic banks should be quickly and orderly resolved to avoid higher fiscal costs from rescue operations.
  - As CEMAC banks are holders of Congo’s debt, an assessment of the impact of Congo’s sovereign debt restructuring on CEMAC banks is warranted.
- A preemptive restructuring operation can limit output costs.
  - Evidence suggests a final debt restructuring allowing exit from default may translate into faster recoveries.
  - Pre-emptive restructurings concluded quickly and cooperatively are more likely to be associated with lower haircuts, shorter renegotiation duration, quicker access to international capital markets, and significantly lower output losses compared to post-default crises.

*Source: 1cogea2019001 - 9. Risks stem from provisioned (Republic of Congo, IMF).*

### 7.      Large oil rents could create incentives to corruption at various stages of the oil value

### 7.      Large oil rents could create incentives to corruption at various stages of the oil value chain including exploration, development, and production and trading.

### Summary of main corruption risk sources
- Three main sources of corruption risks in oil revenue management in Congo: (i) the Production Sharing Agreements (PSAs); (ii) inadequate budget reporting and misallocation of oil funds; and (iii) the national oil company, the Société Nationale des Pétroles du Congo (SNPC).
- Important players in the oil sector include the Ministry of Hydrocarbons, the Ministry of Finance, SNPC, international oil companies, and oil traders.

### Production Sharing Agreements (PSAs) — findings and risks
- PSAs allow Congo to retain ownership of oil resources while granting exploration and production rights to contractors who assume costs later recovered against a share of oil production.
- The 2016 Hydrocarbons Code (enacted by Parliament but still lacking implementing regulations) provides more transparent basis for awarding licenses and guidance on fiscal terms; it requires Parliament approval of all PSAs and publication in the official gazette. Lack of transparency about some contractual terms (such as the amount of the signature bonus) may disguise illegal payments to public officials.
- Specific PSA terms are negotiated case-by-case; negotiations are complex and recognized by authorities to be open to abuse by companies. Opacity in negotiations creates incentives for corruption.
- Authorities offered more generous fiscal terms to oil companies in 2015; these revised terms have affected about half of oil production since 2015 and:
  - reduced the government’s share of oil production from 56 percent in 2012–14 to only 40 percent in 2015 and to around 37 percent in later years.
- Local content requirements under the 2016 Hydrocarbons’ Code:
  - National companies (defined as companies based in Congo where more than 50 percent of shares are held by individuals with Congolese nationality) must hold a 10 percent share in new joint ventures but are subject to same obligations as other contractors.
  - Contractors must employ Congolese personnel and give preference to equipment and services of Congolese origin if price is no more than 10 percent higher than foreign equivalents.
  - At least 25 percent of development and operational costs of oil fields must be sourced locally.
  - If requirements are not met, companies are not allowed to recover any additional costs incurred.
  - Such requirements can support diversification but represent significant risk of rent-seeking and potential channeling of “kickback” schemes to public officials.

- Table: Republic of Congo: Old and New PSA Terms (% of Production)
  - Old fiscal terms / New fiscal terms
    - Royalties 12% / 15%
    - Cost Stop 50% / 50%
    - Threshold Price (US$/bbl) 34 / 55
    - Excess oil 50% / 50%
    - Profit oil 60% / 50%
    - Super profit oil 70% / 66%
  - Oil companies' share (% of total production unless otherwise stated)
    - Cost oil (U$/bbl) 45 / 45
    - Excess oil 50% / 50%
    - Profit oil 40% / 50%
    - Super profit oil 30% / 34%
  - Government shares (% of total production unless otherwise stated) — (see above government share reductions)

### Misallocation of oil funds and inadequate budget reporting — findings and risks
- Forecasting weaknesses:
  - No clear methodology used for oil forecasting.
  - Inconsistencies between estimates of oil production and oil revenues produced by oil companies at year-end and data collected by the Ministry of Finance.
  - Reconciliation between value of production (based on PSA terms) and amounts received by the Treasury has been problematic.
- Reconciliation exercise (period 2014–17) identified substantial off-budget oil revenue:
  - Off-budget oil-backed pre-financing arrangements contracted by SNPC with oil traders: US$2.5 billion.
  - Special contracts with oil companies repaid with equivalent of at least US$ 0.5 billion in annual withholdings of government oil; these were largely used to finance infrastructure including a power station.
  - Additional oil revenue bypassing budget processes identified: about US$250 million per year; reportedly used to finance transfers to the oil refinery and payments of the government’s share in operating costs of five oil fields in which it participates.
- Anti-Money Laundering (AML) concerns:
  - CEMAC regulations require export proceeds in foreign currencies to be repatriated and surrendered to the regional central bank within one month.
  - Authorities indicate multinational companies tend to evade this requirement.
  - Compared to peers, Congo shows below-average performance on a range of AML indicators with little to no improvement over time (RGC, 2018).

### The role of SNPC — governance and transparency vulnerabilities
- SNPC mandate and operations:
  - Created in 1998; dual mandate: manage its own share of production received through stakes in oil fields from joint-ventures and manage the state’s oil share on behalf of the government.
  - SNPC remits proceeds of oil sales—net of its fees—to the Treasury on a quarterly basis.
- Accounting and reconciliation weaknesses:
  - Regulations governing management of the state’s oil resources are loosely implemented by SNPC.
  - EITI could reconcile quarterly oil transfers between oil producers and SNPC based on PSAs, but could not reconcile SNPC’s disclosed quarterly transfers with those received by the Treasury.
  - Weak capacity partly explains the mismatch; weak corporate governance in SNPC increases corruption vulnerabilities.
- Oil trading opacity and related risks:
  - Politically Exposed Persons (PEPs) can influence SNPC decisions related to oil trading transactions (including pre-financing and oil-backed infrastructure agreements).
  - In absence of full transparency and sufficient oversight, proceeds may have been channeled abroad to companies with obscure beneficial ownership or related to PEPs or their networks.
  - Severe lack of published timely and regular information on:
    - regulations for competitive public tenders for sale of oil,
    - objective criteria for selection of buyers or pre-qualification of local suppliers,
    - a list of oil buyers and/or traders,
    - the volume of oil sales and their pricing.
  - Opacity raises concerns about potential mispricing of transactions; World Bank (2007) reports financial audits uncovered SNPC selling the state’s share of crude oil at prices 5 to 6 percent below market.

### Public investment, procurement, and corruption vulnerabilities
- Rapid scaling-up of public investment occurred amid strong perceptions of corruption.
- Corruption opportunities across the investment project cycle:
  - Planning phase: weak coordination and planning of investment needs; lack of rigorous project appraisal; limited information on public investment plans and PPP strategy; absence of clear PPP regulatory framework and objective criteria for project selection.
  - Allocation phase: politically driven project selection; use of extra-budgetary funds; oil-barter investment agreements.
  - Implementation phase: inefficient and non-transparent procurement; lack of effective internal control and internal audit; unreported data on investment activities; lack of external audit; uncontrolled and unreported bank accounts.
- Examples of off-budget / non-competitive arrangements and costs:
  - SNPC refinancing agreements with oil traders: US$ 2.5 billion.
  - Specific agreements with oil companies to build infrastructure (e.g., The Electric Central project built by ENI) that did not go through competitive tendering: cost to the state of US$ 568 million.
- Procurement and control weaknesses:
  - 2009 procurement law introduced requirement that complaints be reviewed by an independent body; it is not known whether reviews have been carried out or rigorously enforced.
  - Public lacks access to complete, reliable and timely procurement information; no available data on public tendering versus direct procurement.
  - Insufficient controls, absence of sanction mechanisms when regulations are breached, weak capacity of procurement civil servants.
  - Only a limited number of procurement audits conducted in recent years; these excluded high-value contracts.
- Impact on service delivery and business environment:
  - Selected projects often not the most productive or efficient and may be carried out at excessive costs; may not significantly improve access to electricity.
  - Public sector corruption perceived as major obstacle to doing business:
    - 65 percent of firms perceive corruption to be a major constraint to business (2009 ICA survey).
    - Close to 40 percent of firms experienced at least one bribe request during tax inspections; the ratio increased to 82 percent for public officials.
    - Firms report informal gifts or payments to obtain electricity or water connection, contributing to high costs of doing business.

### Dividends from anti-corruption reforms — model and scenarios
- A Debt, Investment, Growth and Natural Resources (DIGNAR) dynamic macroeconomic model was used to estimate potential macroeconomic impact of governance reforms on output, private investment, private consumption and debt.
- Anti-corruption reforms incorporated in the model address vulnerabilities through:
  - (i) reduction in bribery of public officials and other distortions (captured by an implicit tax similar to a bribe rate) which would boost private sector investment;
  - (ii) improvement in public investment processes raising public investment efficiency and translating into a larger capital stock;
  - (iii) a more efficient government bureaucracy which would reduce tax evasion, widen the tax base and increase tax revenues;
  - (iv) improvement in oil sector governance that would correct mispricing of Congolese crude oil exports leading to higher oil fiscal revenues.
- Three reform scenarios calibrated:
  - Baseline scenario: effect of an ambitious but realistic reform package that would advance Congo within the distribution of SSA countries.
  - Second scenario: assumes a partial reversal of reforms as commitment may falter over time.
  - Third (more conservative) scenario: less ambitious reforms.
- More technical details on model calibration to Congo are provided in the working paper.

*Source: IMF staff (chapter text provided).*

### 21.      Under the baseline scenario, simulations show that anti-corruption reforms can

### 1cogea2019001 - 21.      Under the baseline scenario, simulations show that anti-corruption reforms can

### Baseline scenario: macro-fiscal impact of comprehensive anti-corruption reforms
- Additional growth of 1.8 percent per year on average for the next 10 years.
- Reform calibrations:
  - Reduction of bribes calibrated to boost private sector investment within ten years from 14 to 16 percent of GDP, advancing Congo by a decile in the distribution of SSA countries.
  - Public investment efficiency rises from 0.43 to 0.58 (the median level of SSA countries).
  - Non-oil revenue increases by 2 percentage points of GDP.
  - Correction of mispricing of Congolese crude oil exports results in an additional 7 percent of total oil revenues.
- Public debt impact:
  - Public debt would be reduced at a rate of about 3 percent of GDP per year.
  - 10 percent of the increase in growth and almost one third of the reduction in public debt is the outcome of improved oil sector governance.
- Model and sources:
  - Figure 8 results from DIGNAR model simulations and IMF staff calculations.
  - Notes: x-axis reflects years; policy changes occur in year 0; red line refers to a scenario when there is partial reversal of reforms in year 4.

### Less conservative and partial-reversal scenarios
- Partial reversal of reforms:
  - Increase in non-oil growth of 0.8 percent per year.
  - Decrease in public debt by 2.25 percent of GDP per year.
- Less ambitious reform package:
  - Non-oil growth increase of about 1 per year.
  - Public debt reduction by 2 percent of GDP per year.
- Calibration details are available in Melina et al. (2019).

### Reforms already undertaken by the authorities
- Governance signaling and legal measures:
  - Published a government-approved diagnostic study on governance informing an anti-corruption strategy.
  - Adopted laws to establish an anti-corruption commission with investigative powers.
  - Introduced asset declaration requirements for senior political figures.
- Public investment efficiency measures committed:
  - Publish detailed information on the level and composition of public investment.
  - Conduct an investment tracking survey to improve efficiency of public investment.
  - Strengthen external controls by adopting a law on the organization and functions of the supreme audit institution of Congo (Cour des Comptes et Discipline Budgétaire, CCDB) and its implementing regulations.
  - Restructure the internal audit system and establish a mechanism to coordinate internal and external audit institutions.

### Oil sector governance improvements and commitments
- Measures taken:
  - Council of Ministers decree in 2017 introduced revised statutes for the SNPC clarifying accountability for functions performed on behalf of the state (Article 59 of the 2017 Statutes for SNPC).
  - Efforts to increase transparency of information exchanged between the Ministry of Finance, the Ministry of Hydrocarbons, and the SNPC.
  - Government submitted draft amendments in late 2018 requiring the SNPC and its subsidiaries to publish their audited financial statements.
  - SNPC has published online oil production sharing agreements and agreed to publish oil-backed contracts that give other companies rights to the government’s share of oil production.
- Opportunities:
  - Expiry of some PSAs over the next few years offers an opportunity to renegotiate with better terms for the government.
- Suggested complementary measures:
  - Reform of PSA terms.
  - Measures to reduce the risks of corruption in oil trading.

### Additional recommended oil-sector reforms and controls
- First: the state should audit the recovery costs claimed by oil companies.
- Second: SNPC should publish detailed information on oil volumes, prices, sales and buyers to reduce corruption risks related to oil trading.
- Complementary measures:
  - Enhance the AML framework to deter and detect illicit transactions related to oil trading.
  - Subject all financial flows between the SNPC and the state general budget to independent audit and oversight to increase government accountability for the use of oil revenue.

### Contextual fiscal and macro developments (selected figures from source)
- GDP and sector performance:
  - GDP contracted by 2.8 percent in 2016.
  - Oil sector: -1.5 percent in 2016.
  - Non-oil sector: -3.2 percent in 2016.
  - Inflation decelerated to 1.28 percent (period average) in 2018 compared to 3.2 percent in 2016.
- External sector and reserves:
  - Current account: surplus of 13.8 percent of GDP in 2013; average deficit of 38.8 percent of GDP between 2014 and 2016; deficit narrowed to 5.9 percent of GDP in 2017; surplus of 6.7 percent of GDP in 2018.
  - Imputed gross foreign reserves at BEAC: more than USD 5 billion in 2014 (more than 7 months of imports) to around USD 505 million in 2018 (less than one month of imports).
  - Reserves are far short of the threshold of 4 to 5 months of imports recommended for oil-exporting countries operating under a fixed exchange rate regime.
- Fiscal revenues:
  - Total revenues dropped from 48 percent of GDP in 2014 to 29 percent of GDP in 2018.
  - Non-oil revenues declined by around 6.7 percentage points of non-oil GDP during 2014–18.
  - Exceptional tax exemptions accounted for a total of CFAF 505.7 billion between 2015 and 2018.
- Oil revenue mispricing reconciliation note:
  - If Congolese crude oil were sold at Brent prices, government could accrue an additional 14 percent of oil revenue; if around 7 percent of revenues are due to lower quality of Congolese crude, remaining 7 percent could capture revenues lost to corruption.

*Source: DIGNAR model simulations, IMF staff calculations, and accompanying IMF report text.*

### 7. The slow action in restoring external imbalances reflects rigidities in the structure of

### 7. The slow action in restoring external imbalances reflects rigidities in the structure of our expenditures, due in part to pre-financed oil sales

### Structural fiscal and expenditure rigidities
- Public investment program raised the public investment ratio to 77.5 percent of non-oil GDP in 2014, before dropping to 5.5 percent of non-oil GDP in 2018.
- Major infrastructure projects cited: 2015 African Games facilities; accelerated municipal development; Pointe Noire — Brazzaville (510 km) and Brazzaville — Ouesso (1,100 km) highways; Kintélé international conference center; Denis Sassou N’Guesso University; Water for All project; Maloukou industrial complex; Pointe Noire Electric Power Plant.
- Some investments financed by the government’s share in future oil production through special agreements and pre-financing contracts granting partners rights to receive oil shipments equivalent to the corresponding debt service.
- Current expenditure rose from 43 percent to 52 percent of non-oil GDP between 2015 and 2018 to honor agreements with social partners and maintain public services.
- Wage index changes: index increased by 25 points in 2014 (from 200 to 225); reached 300 in 2017 (increase of 100 points, representing 50 percent of the index value in 2013).
- Wage bill ratio increased from 11.4 percent of non-oil GDP in 2014 to 14.3 percent in 2018.
- Energy subsidy: providing crude oil to CORAF at no cost averaged 6 percent of non-oil GDP between 2014 and 2018; contributions from the government’s oil share also covered the Pointe Noire Electric Power Plant.
- Other current primary expenditures fell by 4 percentage points of non-oil GDP due to cuts in goods, services, and common costs.

### Public debt accumulation and debt service
- Public debt rose from 20 percent of GDP in 2010 to 87.8 percent of GDP in 2018, exceeding the regional ceiling of 70 percent.
- External debt: 61.3 percent of GDP; composition highlighted: official loans from China 21.4 percent of GDP; oil-backed loans contracted in 2014–15 16.4 percent of GDP.
- Domestic debt rose to 26.5 percent of GDP in 2018, with arrears to local suppliers and statutory advances from the BEAC comprising the bulk.
- Annual debt service estimated at an average of US$1.4 billion between 2019 and 2022; China and oil traders account for 47 percent of this amount.
- Domestic debt audit for 2014–2016 finalized in April 2019 focused on domestic arrears owed to the private sector; inventory of special contracts with oil companies was conducted.

### Monetary aggregates, banking liquidity, and financial stability
- Net foreign assets declined significantly with the drop in export proceeds.
- Government deposits with BEAC fell from CFAF 1300 billon in 2014 (19 percent of GDP) to CFAF 64 billion in 2018 (1 percent of GDP); deposits fell by 60 percent between 2014 and 2018.
- Net foreign assets of the banking system fell from CFAF 2768 billion at end-2014 to CFAF 252 billion at end-2018.
- Credit to the economy contracted due to sluggish domestic demand and increased government reliance on domestic bank financing.
- BEAC removed national ceilings for banks’ refinancing limits; limits now determined at the regional level.
- Non-performing loans (NPLs) reached CFAF 287.1 billion at end-2018, up by 30.9 percent compared with 2017.
- NPLs accounted for 23.1 percent of gross credits in 2018 compared to 16.5 in 2017 and 4.8 percent in 2016.
- Prudential compliance: fewer than half of institutions comply with all COBAC norms; four institutions face significant difficulties (including two failing minimum capital/solvency criteria, one being publicly owned) and together account for 4 percent of the market but are not considered systemically risky.

### Governance, transparency, and public financial management reforms
- Progress made on CEMAC harmonized public financial framework: Transparency Law and Organic Law related to the Budget Laws approved and enacted; decrees on implementation regulations for State Budget Nomenclature, Government Accounting System (GAS), Table of Government Fiscal Operations, and General Regulations on Public Accounts adopted in Q1 2018.
- Treasury repatriated remaining deposits in China (CFA 51bn or 0.8 percent of GDP) before end-2018; government deposits at BEAC declined to CFA 64bn (1 percent of GDP).
- Civil service survey (April 2018) identified 61,868 active civil workers and 1,500 contractual workers; survey identified around 9,000 ghost workers (senior politicians, magistrates, auditors and embassy employers not included).
- Diagnostic report published June 2018 analyzed economic impact of weak governance and corruption across: (i) rule of law; (ii) public financial management; (iii) supervision of the financial sector; (iv) regulation of markets and business climate; (v) anti-money laundering; (vi) anti-corruption framework — includes a medium-term strategy.
- Measures adopted:
  - Parliamentary approval of amendments to SNPC law requiring annual publication of audited financial statements.
  - Online publication of oil production sharing agreements and SNPC’s audited financial statements 2012–16.
  - Publication of new data series to monitor economic activity and increase transparency (monthly inflation rate, quarterly government finance statistics projections, quarterly outturns on domestic and external debt stock and debt service).
  - Completion of a fiscal safeguards assessment.
  - Parliamentary approval of three laws: (i) establishing an anti-corruption commission with investigative powers; (ii) introducing asset declaration requirement for senior political figures; (iii) creating a commission on transparency in public finance management.
- Remaining challenges: systemic governance difficulties persist; lack of information and statistics on public services signals governance and transparency gaps.

### Social outcomes and safety nets
- Poverty declined from 51 percent in 2005 to 36 percent in 2015; vulnerability rose from 29 to 33 percent between 2005 and 2011; poverty outside Brazzaville and Pointe Noire exceeds 70 percent (World Bank statistics).
- Lisungi social safety nets program (with World Bank) aims to establish a national program and pilot cash transfers to improve access to health and education.
- Lisungi reported results: quarterly cash transfers to 7,975 households and 1,361 elderly people; improvements in health center visits, school attendance, and productivity tied to compliance with health and education benchmarks.
- Lisungi transfers resumed in Q1-2018 thanks to World Bank and French AFD financing.
- Total underlying budget lines for social spending estimated at CFAF billion 277.9 (10.9 percent of non-oil GDP) in 2018, of which 35.8 billion for social safety nets; expected public disbursement on safety nets did not occur because of government cash shortages.

### Medium-term macroeconomic outlook: non-program vs program scenarios
- Non-program scenario: sharp contraction in GDP in coming years despite positive oil sector trends to 2020 due to fiscal adjustment, drying-up of net foreign assets, loss of investor confidence, rising NPLs, and accumulation of arrears in priority social spending.
- Program scenario: non-oil GDP declined by 5.5 percent in 2018 and is expected to gradually recover to potential of 4 percent over the medium term.
- Oil sector growth supported by increased Moho North production and international oil price stability around US$60 per barrel.
- With easing of fiscal and monetary policy under the program, inflation should rise but remain within convergence limits for the region.

### 2019–22 economic and financial program: objectives, fiscal anchor, and measures
- Program objective: contribute to regional reserves of three months of imports by 2021 and restore public debt sustainability via an ECF-supported medium-term program organized around five pillars: (i) fiscal adjustment with public debt restructuring and protection of vulnerable populations (including women); (ii) safeguarding financial sector stability; (iii) strengthening governance and transparency; (iv) statistical capacity building; (v) structural reforms for business climate, diversification, and regional integration.
- Fiscal consolidation core elements: (1) fiscal adjustment to align expenditures with realistic revenues/financing and correct current balance compatible with external stability; (2) debt restructuring to restore sustainability and provide financing assurances; (3) strengthening public financial management and fiscal transparency to fight corruption.
- Medium-term fiscal targets:
  - Reduce the non-oil primary deficit from 28 percent of non-oil GDP in 2018 to 17 percent of non-oil GDP in 2022.
  - Raise non-oil revenues to 34.2 percent of non-oil GDP by 2022.
  - Total expenditure projected at 55 percent of non-oil GDP in 2022 to preserve social protection, complete ongoing investments, and maintain government services.
  - Increase in oil revenues, surrender of foreign exchange holdings abroad to the BEAC, and partner financing expected to replenish BEAC deposits and strengthen regional reserves.
- Program financing and gaps:
  - Program financing gap of CFAF 1,084 billion.
  - Planned privatization strategy (structural benchmark before end-October 2019) to support financing; study by internationally recognized firm with AfDB to identify assets for sale or concession (potential assets include Maloukou industrial complex, government stakes in two distressed banks, an insurance company, Brazzaville - Ouesso highway).
  - Partner financing requests: AfDB CFAF 262 billion; IMF CFAF 259 billion; World Bank CFAF 171 billion; France CFAF 89 billion.
  - Debt restructuring expected to cover around CFAF 454 billion, or 42 percent of program funding requirements.
- Measures to improve government share of oil resources and transparency:
  - Request IMF technical assistance to align government’s share with best-practices.
  - Begin discussions with oil operators to revise PSAs for a more equitable state share regardless of price levels.
  - Call for tenders to audit costs claimed by oil operators: 21 lots grouped for existing permits; audits to cover 8 permits granted in 2015 not audited and all lots in 2016 and 2017; by end-May 2019 one lot audited with remaining scheduled shortly.
  - Initiate audit of all special agreements with oil operators by end-September 2019.
  - Prior action: report submitted to Parliament in May 2019 on all existing special agreements for in-kind financed infrastructure; request all companies register special agreements with Ministry of Finance.
  - Residual debt amounts in special agreements to be addressed in public debt restructuring (¶33).
  - Plan to resume discussions on the 2011 tax on negative externalities and cancellation of tax exemptions on imports granted to the sector (except for capital goods).

*Italic: Source: 1cogea2019001 - 7. The slow action in restoring external imbalances reflects rigidities in the structure of (PDF chapter).*

### 24.      We will also reduce subsidies and other fiscal and budgetary losses. Transfers to the oil

### 1cogea2019001 - 24.

### Subsidy reductions and oil-sector transfers
- Transfers to the oil sector (CORAF and the Congo Electric Power Company (CEC) included in the State Budget) would be capped at CFAF118 billion in 2019, representing a decrease of CFAF 206 billion relative to 2018.
- Measures to reach the objective:
  - A performance contract with CORAF based on efforts to reduce operating expenses and lower investments in 2019, and on payment by CORAF for the price of crude oil deliveries by the State into the Treasury Single Account (TSA).
  - The contract allows CORAF to sell petroleum products directly to distribution companies and to directly recover its claims from these sales from those companies.
  - Quarterly review by the Ministries of Finance, trade and hydrocarbons of the main parameters of the pricing mechanisms of the final petroleum products.
  - Reduction of crude State oil deliveries to be replaced by larger deliveries from oil companies.
  - Follow-up with CORAF to recover realized excesses beyond subsidies provided for in the budget law.
  - Conditioning the payment of the subsidies to the CEC on the receipt of quarterly spending to justify the subsidy, and the requirement of company income figures that include energy sector claims.
  - Initiation of an organizational, commercial, and financial audit of each company before end-December 2019 to identify reforms necessary for financial viability and gradual elimination of public subsidies.

### Controls on tax and budgetary concessions; off-budget expenditures
- Study to withdraw investment code exemptions from operators who did not complete planned investments.
- End to exceptional exemptions granted on a discretionary basis by the finance minister and extrabudgetary expenditures through new implementing regulations of the budget law.
- Budget Law for 2019 incorporates all State budgetary spending including those backed by oil shipments and:
  - Prohibits payment of expenditures that have not gone through regular budgetary procedures.
  - Defines precisely the conditions for the settlement of payments through emergency procedures.

### Public financial management and fiscal-risk control reforms
- With World Bank assistance, launch a survey to follow up on investment projects initiated since 2014 to assess effectiveness.
- Conduct a PIMA assessment to strengthen the public investment management framework.
- Ensure interconnection of customs (SYDONIA) and tax authorities (SYSTAF) information management systems before end-June 2019.
  - Tax centers to be interconnected before end-June 2019 to enable SYDONIA–SYSTAF interconnection.
- Prepare a report on state-owned enterprises no later than end-September 2019 to improve management strategies.
- Work on: (i) expanding the scope of public finances to include social security funds and local administrations; and (ii) strengthening collection and dissemination of data on publicly guaranteed debt and contingent liabilities.

### Medium-term public financial management priorities
- Transition to a more sophisticated version of the financial management information system (SIGFIP).
- Drafting, approval, and publication of budget review laws in a timely manner.
- Establish conditions for optimal management of government jobs and salaries.
- Update action plan to improve public financial management based on:
  - 2014 PEFA results, PEMFAR recommendations, and various IMF technical assistance mission results.
  - Measures implementing CEMAC directives.

### Fiscal policy in 2019 — budget stance and macro targets
- 2019 budget approved on December 28, 2018, aligns with program parameters and supports adjustment started in 2015.
- Overall balance estimated at 7.5 percent of GDP, based on sustained fiscal effort and national oil production.
- Oil revenues amounting to 19 percent of GDP.
- Non-oil primary deficit would decline from 28 to 24.8 percent of non-oil GDP between 2018 and 2019.
- Investment spending allowed to increase by 5.7 points of non-oil GDP.
- Total current primary spending to be kept at 44 percent of non-oil GDP.
- Total amount of investment spending limited to 11.3 percent of non-oil GDP.
- Action plan to gradually reduce the wage bill as a percentage of non-oil GDP to be adopted before end-September 2019.

### Revenue measures and targets
- Non-oil revenues expected to increase by about 6 percentage points of non-oil GDP, bringing them to 29 percent of non-oil GDP.
- New fiscal measures in the 2019 Budget Law include:
  - Elimination of the reduced VAT rate for imports.
  - Increase of the withholding tax to 10 percent.
  - Institution of subscription and resubscription taxes of 10 percent on television.
  - Improved efficiency across administrations.
  - Institution of a 2 percent corporate tax rate applicable on the renewal of establishment conventions upon their expiry.
  - Institution of a fee of 1 percent on e-transactions (digital hub).
  - Reduction of the turnover tax threshold from CFAF 100 million to CFAF 60 million.
  - Approval of a revised price structure for petroleum products by end-October 2019, including higher taxes and an automatic indexation mechanism (structural benchmark).
- Administrative measures to improve fiscal controls include:
  - Delegation of fiscal controls to appropriate agencies.
  - Improvement in recovery rates.
  - Mobilization of revenues from interconnection of agencies.
  - Enhancement of internal controls.
  - Faster treatment of litigated claims.
- General Direction of Customs and Indirect Taxation envisages 11 measures, notably:
  - Ensuring compliance of establishment conventions with regional and national regulations (investment law).
  - Effectively taxing refined oil imports by SNPC and SNAT.

### Social spending protections and allocations
- Total amount under related budget lines: CFAF 306 billion (11.8 percent of non-oil GDP) for 2019 (indicative target), of which CFAF 32.3 billion is for social safety nets.
- Social expenditures to be programmed in the General Directorate of the Budget computer system for monthly execution tracking.
- Health sector appropriations: CFAF 126.8 billion (vaccinations, anti-retroviral drugs, tuberculosis and malaria campaigns, free Caesarian sections, essential generic medicines, laboratory testing, revitalization of health districts).
- Social protection appropriations: CFAF 32.3 billion, divided among charitable activities and social assistance; integration/reintegration of disabled persons and minorities; self-employment and training; coverage of the Lisungi cash transfer program implemented with the World Bank.
  - Appropriations of CFAF 18.3 billion to expand the Lisungi project (structural benchmark for end-December 2019):
    - Resumption of payments for 4,000 households enrolled in the Single Social Register (SSR).
    - Starting payments to at least 80 percent of the 41,000 households enrolled in the SSR.
  - By end-2019, increase number of households enrolled in the SSR to 200,000 and increase transfer amounts per household.
  - Plan for gradual scale-up to CFAF 199.3 billion to cover about 192,065 households, with targeting based on poverty incidence.
- Education envelope: CFAF 43.6 billion for primary and secondary education priorities, free school supplies, school meals, acquisition of classroom desks, and addressing teacher shortage estimated at 22,605 teachers over the 2018–22 National Development Plan period.
- Expenditures promoting women: CFAF 4.1 billion for capacity building (rehabilitation centers, women’s shelter), economic empowerment (support for women's savings banks, income-generating activities), and political empowerment and gender policy implementation.
- Electricity, water, and urban sanitation appropriations: CFAF 62.5 billion (Water for All program, drainage cleaning and vector control, construction of electric power facilities).
- Agriculture, fishing, and stock farming appropriations: CFAF 17.5 billion (manioc, banana, cacao programs; mentoring market gardeners; distribution of improved seeds; farm extension services; promotion of poultry).
- Reducing isolation and vulnerabilities: CFAF 19.2 billion for construction/rehabilitation of rural and farm roads, maintenance/dredging of rivers and navigation markers, community projects.

### Financing gap for 2019 and financing assurances
- 2019 budget financing gap: CFAF 362 billion, with firm assurances of financing.
- Annual disbursements for 2019 with new financing totaling CFAF 270 billion were negotiated with:
  - African Development Bank: CFAF 131 billion.
  - World Bank: CFAF 57 billion.
  - IMF: CFAF 52 billion.
  - France: CFAF 30 billion.
- Residual financing gap of CFAF 92 billion to be covered within the framework of debt restructuring (¶22).

### Restructuring of public debt — scope and objectives
- Publicly announced intention to restructure public debt on April 18, 2018; strategy covers almost 80 percent of debt.
- Exclusions: multilateral creditors with preferred creditor status, statutory advances from the BEAC, T-bills, sub-regional bond issue maturing in 2021, and claims already handled under HIPC Initiative (including the Eurobond maturing in 2029).
- Strategy calls for a freeze on debt service payments during negotiation period for debts covered by restructuring; portion corresponding to ability to pay to be deposited in an escrow account and applied against payment once agreements are reached.
- Submitted proposed restructuring agreements to external creditors aiming to reduce PV of external debt to less than 30 percent of GDP in 2023.
- Reached agreement with China; negotiations ongoing with commercial creditors with aim to finalize before first review of proposed ECF-supported program.
- Consideration for contingency mechanism to increase debt relief in case of lower oil prices.
- Domestic debt restructuring to follow completion of a new audit by an internationally recognized firm, to be finalized before October 2019; audit to cover all outstanding claims after 2016 including budget exercises of 2017 and 2018, all arrears of the General Direction of Public Works, and all claims by the local private sector (structural benchmark).
- Approve a domestic debt restructuring strategy and payment schedule before end-October 2019 (structural benchmark); priority to clearing social arrears.
- Commitment to not accumulate any new external arrears.
- All external official arrears to be cleared before the first review of the proposed ECF-supported program (December 2019).
- Special contracts with oil operators to be renegotiated within the context of the debt restructuring.
- Continued efforts to resolve disputed external debt obligations to eliminate uncertainties regarding public debt level.

### Debt policy, management, and transparency measures
- Resort exclusively to concessional external loans for duration of the program, seeking refinancing in regional and national markets for previously-issued securities and coverage of very short-term liquidity needs.
- After restructuring, non-concessional financing may be used on an exceptional basis exclusively for refinancing previous non-concessional loans that are significantly costlier.
- National Public Debt Committee adopted a debt procedure manual in May 2019, including obligation for all parties to transmit data on disbursements to the Congolese Debt Unit (Caisse Congolaise d'Amortissement — CCA).
- Adopt a debt management strategy by October 2019.
- CCA to establish a single database, regularly updated, including guaranteed or unguaranteed domestic and external debt of public companies, public institutions, and local authorities.
- Strengthen reliability and transparency of public debt information through:
  - Improved recording and quarterly publication of data on existing stock of public debt and projections of changes in guaranteed or unguaranteed domestic and external debt of public companies, public institutions, and local authorities.
  - Better coordination and sharing of information among agencies concerned, as recommended in the IMF technical assistance report of September 2016.
- To increase flexibility in managing oil revenues, the government will refrain from contracting new pre-financing agreements and oil-for-infrastructure barter arrangements and will limit borrowing to concessional loans.
- Commitment to further fiscal consolidation efforts if new debt surprises or contingent liabilities materialize.

*REPUBLIC OF CONGO  INTERNATIONAL MONETARY FUND*

### 35.      The government will strengthen the stability of the financial system in consultation

### 1cogea2019001 - 35.      The government will strengthen the stability of the financial system in consultation

### Financial stability and bank resolution
- Publish the strategy for the repayment of domestic arrears to support a reduction in loans in arrears and improve visibility for economic operators and banks.
- By end-June 2019: adopt a plan for the resolution of a bank which has become insolvent, in consultation with the COBAC. The plan will include liquidation at the lowest cost if no strategic investors are found and will ensure current shareholders are not compensated at the expense of public funds.
- Liquidation of the insolvent bank or its recapitalization by strategic investors to be carried out without delay and should take effect by end-August 2019.
- For the second distressed bank: the Ministry of Finance will pursue sale to private investors based on a restructuring and recapitalization plan that guarantees viability and compliance with prudential ratios.
- Ensure insured depositors are protected via the deposit insurance scheme (FOGADAC).

### External assets, foreign exchange, and regional monetary policy
- Tightening of regional monetary policy and strict enforcement of new foreign exchange regulation to help rebuild net external assets.
- Commitments (in line with Tripartite Consultation conclusions, Douala, April 2019):
  - (i) Repatriation and surrender of foreign assets held in offshore accounts by all public companies, including any company where the State is a shareholder (including subsidiaries), before end-December 2019.
  - (ii) A strict limit on new exemptions from the foreign exchange regulations.
  - (iii) Sharing with the BEAC all information on companies benefiting from such exemptions.
- Structural benchmark: Ministry of Finance to transmit to the BEAC before end September 2019 all laws, contracts or agreements with oil operators granting them new exemptions from foreign exchange regulations.
- Ensure contracts/conventions are compatible with national regulation; encourage oil operators to consult with BEAC and tighten customs administration to ensure domiciliation of all export proceeds with banks in the region.

### AML/CFT framework and supervision
- 2015 assessment by GABAC identified serious weaknesses; plan improvements ahead of a new assessment planned for 2020.
- Improvements to legislative and institutional framework based on recommendations of the 2015 report and the 2012 FATF standards.
- Focus on improving capacity to mitigate ML/TF risks, including those related to corruption.
- Encourage COBAC to intensify AML/CFT supervision of Congolese banks.

### Governance and combating corruption — strategic diagnostics and transparency
- Government’s diagnostic study on governance and corruption (published in 2018) is a pillar of the ECF-supported program; reforms focus on the six sectors it covers (¶11).
- May 2019: launch a government web portal and a website of the National Institute of Statistics (INS) and mobilize funding for its operations.
- Complementary studies and actions:
  - (i) Action plan for the performance of an audit of all public companies (before end-2019).
  - (ii) Assessment of fiscal transparency, performed in collaboration with IMF Fiscal Affairs Department.
- Political ownership and transparency: carry out reforms inclusively through consultation with national and external partners.
- Prior actions submitted to Parliament before end-May 2019:
  - (i) Report on pre-financing contracts concluded by the SNPC and in force as of end-2017 (prior action).
  - (ii) Report on all special contracts in force between the government and companies that built infrastructure financed by in-kind payments (prior action).
  - (iii) Report on all projects implemented by the Ministry of Public Works between 2014 and 2017 (prior action).
- KPMG reports on reconciliation of oil flows and a table of holders of mining, forestry, and oil concessions have been posted on the government website (prior action).

### Transparency measures for natural resources and public spending
- Before end-September 2019: adopt implementing decree of the Law related to the Transparency Committee (article 59 of the Transparency Law) to ensure at least one-third of members are drawn from civil society.
- Make the following available to civil society and organize discussions before each ECF program review, with conclusions published within 15 days:
  - Starting in June 2019: publish a quarterly reconciliation report of oil, forestry, and mining revenues on an accrual basis and revenues collected by the Treasury; reports to be published 45 days after the end of the reporting period.
  - By end-June 2019: launch an audit of oil costs with assistance of development partners.
  - Before end-August 2019: publish a list of procurement contracts executed by the Ministry of Public Works since 2014 and continue to publish all public procurement contracts in excess of 1 billion CFAF, including awarding conditions.
  - Before end-July 2019: publish assessment reports of the Extractive Industries Transparency Initiative (EITI) and reports of IGE, IGF, and CNC; publish a list of businesses and public institutions that have not provided necessary access to oversight bodies for audits and those late in paying financial obligations to the CNC.

### Public financial management (PFM) reforms and civil service controls
- By end-August 2019: launch a biometric survey of civilian government employees to complement the April 2018 field survey.
- Government to approve the survey report by end-2019 and take corrective measures per general civil service regulations; final survey results to be harmonized with payroll records.
- Perform targeted monthly inspections of civil service employees within ministries.
- By end-November 2019: design and implement a medium-term strategy for PFM reforms with a three-year rolling action plan in accordance with CEMAC directives.
- Additional measures:
  - By end-December 2019: adoption of a Law on the allocation, organization and functioning of the Audit Court (Cour des Comptes et de Discipline Budgétaire) and its implementing regulations.
  - By end-December 2019: adoption of the new organizational structure of the Ministry of Finance and Budget.

### State financial flows and Treasury Single Account (TSA)
- Before end of July 2019: prepare a comprehensive list of all government accounts in the banking system and approve an action plan to close them and transfer balances to the TSA at the BEAC.
- Ensure automatic transfer of sale proceeds of oil shipments into the TSA in compliance with SNPC’s oil marketing mandate.
- Starting end-September 2019: the free portion of the government’s accounts in China will be automatically transferred to the TSA.
- Starting end-September 2019: all public revenues will be included in public accounts when received and all financial transactions will be included in public accounting.
- Commit to correct vulnerabilities in government accounting through production of reliable government accounting balances for 2017 (end-October 2019).

### Rule of law, judicial transparency, and anti-corruption institutions
- Starting in June 2019: publish on the website for each court of law (or magistrates’ court):
  - (i) number of sitting judges, size of the workforce, and number of vacant positions;
  - (ii) number of cases involving corruption, AML/CFT, insolvency, foreclosures, and the property sector for 2015, 2016, and 2017;
  - (iii) all decisions of the Supreme Court and all decisions issued by all courts concerning corruption cases since 2018.
- By end-September 2019: adopt implementing decrees of the Law establishing an Independent Anti-Corruption Commission with investigative powers (structural benchmark) and of the law on the implementation of the constitutional asset declaration requirement.
  - Implementing decree of the anti-corruption commission law will explicitly guarantee the Commission’s independence and investigative powers and specify responsibilities and reporting obligations.
  - Work with IMF staff to identify and improve shortcomings of the Law on implementation of the constitutional asset declaration requirement to ensure conformity with best practices.
  - Application to include assets held directly or as a beneficial owner in Congo or abroad by politically exposed persons, including all citizens elected or nominated for a high public position, as defined by the CEMAC AML/CFT regulation of 2016; provide deterrent penalties for noncompliance.

### Additional anti-corruption and AML/CFT measures
- In consultation with Fund staff:
  - Submit to Parliament an amendment to the existing anti-corruption law to ensure full compliance with the UNCAC, including domestic criminalization of all actions set in Chapter III of the UNCAC (structural benchmark).
  - Ensure inclusion of such crimes as predicate offenses to money laundering.
  - Support banks’ fulfillment of obligations with respect to politically exposed persons through publication of their asset declarations and payment of all their salaries to their accounts at Congolese banks by August 2019; encourage COBAC to intensify supervision of these obligations.
  - Capacity building of the National Financial Investigation Agency (ANIF) based on an assessment of its needs, supported by technical assistance, with publication expected by January 2020.
  - Criminalization of corrupt actions in accordance with UNCAC and their designation as money laundering predicate offenses.
  - Prepare a study, in consultation with IMF staff, to ensure public access to adequate and accurate information on the beneficial ownership of legal entities in accordance with FATF Recommendation 24, by December 2019.

### Business climate reforms
- By end-December 2020:
  - (i) Computerize and publish the company register.
  - (ii) Put in place a single window for handling of property title documents pursuant to Law No. 34-2013 of December 30, 2013.
  - (iii) Publish a complete inventory of parafiscal charges applied to businesses, both formal and informal.
- Additional measures supported by AfDB and World Bank programs:
  - Create a national real estate registry.
  - Simplify procedures and reduce costs to start a business.
  - Reform administrative fees to facilitate monitoring of cross-border trade.

### Statistical capacity building
- Ministry of Planning, Statistics, and Regional Integration launched an emergency plan to improve the national statistics system; entails institutional and organizational reforms, reform of the National Institute of Statistics, and modification of mandates of public agencies to produce data according to a pre-approved model.
- Technical and financial support:
  - IMF Statistics Department technical assistance.
  - World Bank Statistical Capacity Building Project (PSTAT) additional funding of US$25 million approved on April 5, 2018.
- Priorities:
  - (i) human resources training;
  - (ii) administer a general population and housing census;
  - (iii) conduct a survey of household living conditions;
  - (iv) conduct the demographic and health survey.
- National Institute of Statistics to be provided with sufficient funding to develop technical and operational capacities.
- Government requested IMF Statistics Department technical assistance for an overall review of the statistical system (government finance statistics, balance of payments, monetary sector, national accounts) and to develop an action plan to correct identified weaknesses.

### Other structural reforms and diversification strategy
- Reforms based on PREF-CEMAC and the 2018–22 National Development Plan, supported by governance and anti-corruption efforts.
- Diversification strategy priorities:
  - Diversify assets (human capital and infrastructure) and improve the business climate.
  - Support agriculture and value chains in food and lumber industries (¶51).
  - Provide stable, high-quality electricity and reduce processing time for grid connections (¶52–¶53).
  - Promote high-quality education oriented to development needs (¶31).
  - Facilitate starting a business and access to land, credit (¶46).
  - Support health policy aimed at universal coverage and strengthened services for mothers and children; policies started in the 2018 budget.

### Agriculture and agro-industry actions (PNIASAN)
- PNIASAN aims to modernize family farming and promote agro-industry by helping small producer organizations access markets and arrangements with large-scale operators.
- Specific actions under PNIASAN:
  - (i) improve access to land (in particular in peri-urban areas);
  - (ii) rehabilitate and maintain rural roads;
  - (iii) develop plant and animal production and fish farming;
  - (iv) improve producers’ access to financing, particularly for small producers;
  - (v) improve investment climate to attract investors.
- Continue national programs for production of manioc, bananas, and cacao.

### Water and electricity sector strengthening
- Regulatory framework change in June 2017 via implementation decree for the electricity code that liberalizes the sector.
- Law on the dissolution of the National Electricity Company (Société Nationale d'Electricité — SNE) adopted in April 2018; government committed to set up a shareholding company.
- Electricity sector reform provisions prepared with World Bank assistance:
  - (i) open sector to private competition and participation (independent electricity producers);
  - (ii) privatize public services of segments of the sector (transport, distribution and marketing);
  - (iii) arrange new electricity rates in urban and rural areas.
- Priority actions with development partners and private sector assistance:
  - Restore hydroelectric power plants of Moukoukoulou, Imboulou and Djoué.
  - Increase electricity production capacity: prepare project of hydropower plant of Sounda; hydropower development of the Louesse Valley; put Djeno power station into service; extend the Congo power station (CEC construction of a solar field for electrification of the city of Impfondo).
  - Construct the Makoua/Liouesso very high-voltage power line.
  - Improve the transit capacity of the very high voltage line (THT) Pointe-Noire/Brazzaville.
  - Implement the investment program financed by the World Bank and the French Development Agency (AFD) in the electricity sector.

*REPUBLIC OF CONGO — INTERNATIONAL MONETARY FUND (content unit 1cogea2019001).*

### 53.      In 2018 the government launched a project to reform the public water utility sector.

### 1cogea2019001 - 53.      In 2018 the government launched a project to reform the public water utility sector.

### Water utility reform: objectives and design
- In 2018 the government launched a project to reform the public water utility sector.
- Aim: build a more efficient public water utility based on a new approach to governance and a larger share of self-financing.
- Roadmap elements:
  - Dissolution of the National Water Distribution Company (Société Nationale de Distribution d'Eau — SNDE).
  - Creation of a state-owned company.
  - Transfer of operating activities to a private partner recruited through an international public tender in the form of a leasing contract.
- Essential conditions for improving financing capacity:
  - Elimination of flat-rate billing.
  - An increase in water rates.
- Additional reform needs:
  - Clarify the role and responsibilities of the Water Sector Regulatory Authority (Organe de régulation du secteur de l'eau — ORSE).
  - Define methods for operating the public water utility in medium-sized towns and rural areas.
- Investment and modernization:
  - With the support of development partners, the government will modernize the public water utility, maintain existing infrastructure, and expand the networks, in particular in Brazzaville.

### Program financing
- The program is fully financed over the medium term.
- The authorities have obtained firm funding commitments from external partners to supplement exceptional financing expected from debt restructuring.
- Exceptional financing is described and quantified in the restructuring strategy adopted by the government in April 2018.
- A key element of the restructuring strategy is the imposition of a moratorium on public debt service during the negotiation period with creditors of debts affected by the restructuring.
- Over the medium term, the government will continue to work with partners to confirm funding levels that will totally cover the financing gap for the last two years of the program.

### Monitoring of the program and institutional arrangements
- Program alignment:
  - The program supports the 2018–22 National Development Plan approved by Law no. 32–2018 in October 1st, 2018.
  - The National Development Plan was drafted through a participatory process including civil society, the private sector, and development partners.
  - The Plan has three priority strategic pillars:
    - (i) enhancing governance,
    - (ii) reforming the education system and skills and vocational training,
    - (iii) diversifying the economy, with priority assigned to agriculture, tourism, and industrialization.
- IMF monitoring cadence:
  - The program is subject to semi-annual monitoring by the IMF Executive Board based on quantitative monitoring criteria and indicators and structural benchmarks as shown in the attached Tables 1, 2 and 3.
  - Criteria and indicators are defined in the Technical Memorandum of Understanding (TMU).
  - The first semi-annual review will be based on the data and performance criteria as of June 2019 and should take place after December 15, 2019.
  - The second semi-annual review will be based on the data and performance criteria as of end-December 2020 and should take place after June 15, 2020.
- Strengthening internal monitoring:
  - A Committee for Program Monitoring (Comité du Suivi du Programme, CSP) will be established by the government.
  - CSP responsibilities include:
    - Collecting information from entities responsible for implementation of program measures and regularly evaluating performance in program implementation, including through reports to the government.
    - Taking stock of all special agreements and evaluating their impact on the program.
    - Performing a regular reconciliation of oil flows.
    - Tracing all government revenues to the Treasury’s books.
    - Tracking information related to extrabudgetary expenditures.
    - Adopting countervailing measures if necessary.
  - Civil society engagement:
    - Authorities will keep civil society continuously informed of performance during program implementation.
    - The government has started to publish monthly tables with information on the monitoring of program implementation (continuous structural benchmark) on the websites of the Ministry of Finance and the INS. These include:
      - Quarterly budget forecasts and outcomes,
      - The monthly inflation rate,
      - The quarterly public debt position.

### Quantitative performance criteria, indicative targets, and the TMU (key definitions)
- Performance criteria (PC) established in the TMU include:
  - (a) A floor on the basic non-oil primary balance;
  - (b) A ceiling on the central government net domestic financing;
  - (c) A ceiling on accumulation of new arrears on external debt contracted or guaranteed by the central government;
  - (d) A ceiling on new non-concessional external debt contracted or guaranteed by the central government;
  - (e) A ceiling on new external debt contracted by or on behalf of the central government and guaranteed with future natural resource (including oil) deliveries.
- Indicative targets (IT) include:
  - (a) A floor on social and poverty reduction expenditure;
  - (b) A ceiling on disbursements of external loans for investment projects;
  - (c) A ceiling on new concessional external debt contracted or guaranteed by the central government;
  - (d) A floor on non-oil revenue.
- Calculation and cutoff rules:
  - Performance criteria, indicative targets, and adjusters are calculated as the cumulative change from January 1, 2019 for the 2019 objectives, and from January 1, 2020 for the 2020 objectives.
- Definitions relevant for monitoring:
  - Basic non-oil primary balance: government revenue excluding oil revenue and grants minus total government expenditure excluding interest payments, transfers paid with crude oil, and foreign-financed investment.
  - Net domestic financing: issuance of instruments denominated in CFA francs to domestic creditors or on the CEMAC financial markets, borrowing from BEAC (including IMF support), BDEAC, and CEMAC member countries, or other debt arranged with these creditors. Net domestic financing is broken down into net bank financing and net nonbank financing.
    - Net bank financing: change in the government's net position vis-à-vis the banking system (BEAC and commercial banks) including reimbursement of the IMF; calculated using BEAC data reconciled monthly between the treasury and the BEAC.
    - Net nonbank financing: includes changes in outstanding government securities issued in CFA francs on the regional market not held by the Congo banking system, amortization of nonbank domestic public debt, and revenue from privatizations.
  - External payment arrears: all external debt service obligations (principal and interest) matured and unpaid deriving from loans arranged or guaranteed by the central government, penalties, and interest charges not paid at maturity. For PC requirements, external debt service obligations matured and unpaid after 30 days will be considered "program" arrears. Exceptions for "non-program" arrears include: (i) arrears for which the authorities have publicly announced they seek a debt restructuring and have approached creditors; and (ii) disputed external debt service obligations.
  - External debt for ceilings: any debt contracted or guaranteed by the central government with non-residents, with specified exceptions (commercial import credits with maturities < one year; rescheduling arrangements; program-identified sources of budgetary loans; treasury bills and bonds issued in CFA francs on the CEMAC regional market).
  - Concessional debt definition: at contracting date, grant element at least 35 percent (grant element = (nominal value − present value)/nominal value). For debts with grant element equal or below zero, PV is set equal to nominal value.
  - For program monitoring, external debt is considered contracted or guaranteed when all conditions for entry into effect are met, including required governmental approvals.
  - Guaranteed debt: any explicit legal obligation of the government to reimburse that debt should the debtor default (payments in cash or in kind).

*Source: 1cogea2019001 - 53.*

### 11. Natural resources-related external debt is external debt which is contracted by or on

### 1cogea2019001 - 11. Natural resources-related external debt is external debt which is contracted by or on behalf of the government and which gives a creditor any interest in natural resources (including oil), including a collateral interest.

### Definitions: natural-resources related debt, pre-financing, prepayment
- Natural resources-related external debt: external debt contracted by or on behalf of the government that gives a creditor any interest in natural resources (including oil), including a collateral interest.
- Pre-financing: natural resources-related debt which is repaid, in whole or in part, by the sale of natural resources in the future.
- Prepayment: an advance payment by the purchaser in connection with a specifically-identified natural resource shipment.
  - Prepayment operations must be repaid within six months, and in any case within the calendar year during which they were arranged.
- Policy restriction: New pre-financing by or on behalf of the government is strictly prohibited under the program.
  - The refinancing and/or deferral of the existing stock of pre-financing debt and/or due dates are permitted but should not give rise to an augmentation of the existing stock of natural resource-related debt.

### Indicative targets and priority expenditures
- Social and poverty reduction expenditure: defined as public expenditure in priority social sectors conducive to poverty reduction; a detailed list of expenditure items is provided in Table 1.
  - If further expenditure cuts are required, priority social expenditure will be reduced proportionally less than other primary expenditure financed with domestic resources, so its proportion of priority social expenditure in the revised budget will be greater than in the original budget.
- Indicative targets in the program include:
  - Disbursements of external loans in connection with investment projects (ceilings provided in Table 1 of the MEFP). Applies to new disbursements, including liabilities arranged before program approval.
  - New concessional external debts arranged or guaranteed by the government (amounts provided in Table 1 of the MEFP). This indicative target applies to new external borrowing as defined in paragraph 10.
- Non-oil revenue: includes all government's (tax and nontax) revenue, with the exception of oil revenue as defined in paragraph 17 in the TMU. Value-added tax (VAT) is recorded net of VAT reimbursements.

### Memorandum item indicators
- Additional revenue from increased taxation of oil products: a memorandum item used to monitor implementation of a structural benchmark on revising the oil products price structure. The 2019 budget includes these additional revenue projections presented in Table 1 of the MEFP.
- Oil revenue: defined as the government’s net proceeds from the sale of oil, including:
  - the provision for diversified investments,
  - royalties paid by oil companies,
  - the government’s share in produced crude oil.
  - Excludes all forms of prepayment, pre-financing, and oil barter transactions under special agreements that give rights on government oil to oil companies.
  - Projections take account of the 45-day lag between date of shipment and date of receipt of sale proceeds by the Treasury.
- Revenue from privatizations: a memorandum item indicator, connected with a structural benchmark on adoption of a privatization strategy to support financing guarantees for the program.
- Net external assistance (see paragraph 23 and 19): a memorandum item indicator reflecting financing indications from external partners.

### External debt: definitions and forms
- "Debt" corresponds to the definition in paragraph 8 (a) of the guidelines on public debt limits (Decision 15688-(14/107), December 5, 2014). Debt means a direct liability under a contractual arrangement through provision of value (assets or services) that requires future payments in assets or services to discharge principal and/or interest.
- Forms of debt include:
  - Loans (including deposits, bonds, debentures, commercial loans, buyer’s credits), and temporary exchanges of assets equivalent to fully collateralized loans (repurchase agreements, official swap arrangements).
  - Suppliers’ credits (deferred payments after delivery of goods/services).
  - Lease agreements: the debt is the present value (at lease inception) of all lease payments expected during the agreement, excluding payments covering operation, repair, or maintenance.
- Penalties or judicially awarded damages and interest costs arising from failure to make payment under a contractual obligation that constitutes debt shall be considered debt.
- Failure to make payment on an obligation not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

### Adjustors: how quantitative objectives respond to deviations
- Quantitative objectives are calculated based on projected amounts of:
  1. Net external assistance;
  2. Oil revenue;
  3. Revenue from privatization;
  4. Oil-related transfers.
- Net external assistance (program definition): difference between (a) cumulative budget support (grants and loans), the impact of debt relief granted by external creditors, and the net change in "non-program" arrears; and (b) cumulative payments for current external debt service due after debt relief in connection with loans for which debt relief arrangements have been executed. The net change in "non-program" arrears equals total "non-program arrears" for current debt service maturities less cash payments to clear these arrears.
- Adjustment rules (when realizations differ from projections):
  - When total net external assistance and oil revenue exceed program projections:
    - The floor for the basic non-oil primary fiscal balance will be adjusted downward by an amount equal to half of the surplus (so that half of the surplus can be used for additional expenditure).
    - The ceiling for net domestic financing to government will be adjusted downward by half of the surplus.
    - Any additional resources available for expenditure must be used in the social sectors, and the additional amount for net domestic financing will be used to strengthen government deposits at the BEAC (as opposed to repaying faster domestic debt).
  - When oil-related transfers exceed program projections by more than CFAF 30bn:
    - The floor for the basic non-oil primary balance excluding oil-related transfers will be adjusted upward by any amount in excess of the programmed oil-related transfers minus CFAF 30bn.
  - When total net external assistance and oil revenue are below program projections:
    - The floor for the basic non-oil primary fiscal balance will be adjusted upward by an amount equal to half of the shortfall (requiring a budget adjustment equivalent to half of the shortfall).
    - The ceiling for net domestic financing to government will be adjusted upward by half of the shortfall.
    - The expenditure cuts corresponding to half of the shortfall must be applied as a priority outside of the social sectors. At a minimum, the ratio of social expenditure to total expenditure should improve as a result of such expenditure cuts.
  - Adjustments in connection with privatization proceeds:
    - When total receipts from privatization exceed program projections:
      - The floor on the basic non-oil fiscal balance will not be adjusted.
      - The ceiling for government domestic financing will be adjusted downward by an amount equivalent to the surplus.
      - The government will save any additional resources from privatization by increasing its deposits at the BEAC.
    - When total receipts from privatization are below program projections:
      - The floor on the basic non-oil fiscal balance will be adjusted upward by an amount equivalent to the shortfall.
      - The government domestic financing ceiling will remain unchanged.

### Program monitoring and reporting requirements
- Quarterly assessment report: authorities will prepare a quarterly assessment report within a maximum of 45 days after the end of each quarter.
- Structural benchmarks: information on implementation and/or execution of structural benchmarks will be reported to IMF staff within two weeks after their programmed implementation date. The status of implementation of other structural program measures will also be reported within the same time frame.
- The government will report the information specified in Table 2 according to the reporting periods indicated and provide all information required for effective follow-up on economic policy implementation.
- The authorities undertake to consult IMF staff on any new external debt proposals and will report signing of any new external debt arrangements and the conditions pertaining to such debt.
- Selected reporting frequencies and deadlines from Table 2 (exact phrasing preserved):
  - Consumer price indices: Monthly — End of month plus 45 days
  - Cyclical indicators (Directorate-General of Economy Memorandum): Quarterly — End of quarter plus 90 days
  - Estimated national accounts: Annual — End of year plus 3 months
  - Table of government financial operations (TOFE): Monthly — End of month plus 45 days
  - Estimated government tax revenue: Monthly — End of month plus 30 days
  - Pro-poor expenditure: Monthly — End of month plus 30 days
  - Domestic arrears of the central government: Monthly — End of month plus 30 days
  - Budget execution report: Quarterly — End of quarter plus 45 days
  - Detailed statement of domestic debt: Monthly — End of month plus 45 days
  - Detailed statement of external debt: Monthly — End of month plus 45 days
  - Projected external debt service: Quarterly — End of quarter plus 45 days
  - Provisional balance of payments: Annual — End of year plus 6 months

### Social spending in the 2019 budget (selected line items, Billions of CFA francs)
- Basic Health and Fight against Disease: Q1 26.9, Q2 40.4, Q3 40.4, Q4 19.1, 2019 126.8
- Acquisition and management program for essential [medical and technical equipment?]: Q1 2.0, Q2 4.6, Q3 4.6, Q4 2.2, 2019 13.4
- Program of free AIDS drugs: Q1 3.3, Q2 4.3, Q3 4.3, Q4 2.0, 2019 13.8
- Malaria control program: Q1 1.3, Q2 3.7, Q3 3.7, Q4 1.7, 2019 10.5
- Extended vaccination program: Q1 3.2, Q2 4.5, Q3 4.5, Q4 2.1, 2019 14.3
- Revitalization of health districts through the purchase of medical and technical equipment: Q1 12.5, Q2 17.2, Q3 17.2, Q4 8.1, 2019 55.1
- Basic Education: Q1 8.5, Q2 14.2, Q3 14.2, Q4 6.7, 2019 43.6
- Program of free school supplies, textbooks and tuition and teaching materials: Q1 4.3, Q2 8.1, Q3 8.1, Q4 3.8, 2019 24.2
- Electricity, water and sanitation: Q1 13.7, Q2 19.8, Q3 19.8, Q4 9.3, 2019 62.5
- Care for vulnerable people and street children: Q1 4.4, Q2 9.5, Q3 9.5, Q4 4.5, 2019 27.9
- Agriculture, fishing and livestock: Q1 4.2, Q2 5.4, Q3 5.4, Q4 2.5, 2019 17.5
- Promotion of women: Q1 0.7, Q2 1.4, Q3 1.4, Q4 0.6, 2019 4.1
- TOTAL SOCIAL BUDGETARY SPENDING IN LF2019 Proj.: Q1 64.0, Q2 97.9, Q3 97.9, Q4 46.2, 2019 306.0

### Debt sustainability assessment (key findings and thresholds)
- Classification: Risk of external debt distress — In debt distress. Overall risk of debt distress — In debt distress. Granularity in the risk rating — Unsustainable. Application of judgement — No.
- Congo’s debt carrying capacity rated weak according to the composite indicator (CI) based on the April 2019 WEO. As a result, the external debt burden thresholds for The Republic of Congo are:
  - (i) 30 percent for the PV of debt-to-GDP ratio;
  - (ii) 140 percent for the PV of debt-to-exports ratio;
  - (iii) 10 percent for the debt service-to-exports ratio;
  - (v) 14 percent for the debt service-to-revenue ratio.
- Main assessment points:
  - Based on external public debt indicators and the continued buildup of external arrears, the Republic of Congo is classified as “in debt distress”.
  - Despite the recent restructuring agreement with China, public debt remains unsustainable with the net present value of external debt in percent of GDP and the external debt service-to-revenue ratios projected to remain above their indicative thresholds in the medium term.
  - The increase in debt in recent years reflects:
    - large fiscal deficits;
    - a large terms-of-trade loss which caused nominal GDP to decline through deflation and a decline in real GDP growth.
  - Domestic debt has been rising due to the accumulation of domestic arrears and statutory advances from BEAC, further deteriorating overall public debt indicators.
  - Given accumulation of domestic and external arrears and that the net present value of public debt to GDP remains above its benchmark over the medium term, the overall assessment (after incorporating the Chinese debt restructuring deal) confirms that the Republic of Congo is in debt distress.
  - Restoring debt sustainability crucially hinges on the pursuit of fiscal consolidation and the restructuring of private commercial claims.
- Date of assessment: June 28, 2019

### Public debt coverage and data limitations
- Coverage of public debt in this DSA:
  - Limited to central government, but includes oil-backed debt contracted by SNPC, the largest state-owned enterprise.
  - The stock of debt includes public and publicly guaranteed debt of the central government.
  - Local governments are not allowed to borrow and depend on local taxes and transfers from the central government.
  - Debt from state owned enterprises (SOEs) not guaranteed by the government is not included in this analysis because of limited information on their fiscal performance.
    - This is particularly relevant for the national oil company (SNPC), which has suffered from a negative operating balance in recent years due to the slump in oil prices.
    - SNPC does not meet international benchmarks for sound corporate governance, including an independent board, publication of comprehensive annual reports and annual independent audits.
  - Staff will continue efforts to compile information on SNPC and other SOEs to improve the scope of the DSA in the next report, in line with guidelines under the revised LIC-DSF.
  - At the same time, the main source of non-central government debt, which was incurred by SNPC with oil traders, has been incorporated in the analysis.

*Source: Republic of Congo IMF staff report excerpts (June 28, 2019).*

### 2.      The contingent liability stress test is customized to account for vulnerabilities

### 2.      The contingent liability stress test is customized to account for vulnerabilities associated with rejected domestic arrears, non-guaranteed SOEs debt and litigated debt

### Contingent liability stress test — coverage and calibration
- Non-guaranteed SOEs debt is estimated at 10 percent of GDP and the stress test assumes half of this amount could end-up on the central government balance sheet.
- Rejected domestic arrears are about 6.4 percent of GDP and are treated as a potential contingent liability in the stress test.
- An additional claim from a foreign construction company (Commisimpex) of 7.5 percent of GDP is being litigated (and is not included in the debt stock); this disputed external claim is included when calibrating the contingent liability stress test.
- The stress test is calibrated to account for these potential risks to the public-sector balance sheet.
- Upside risk: previous audit experience suggests the stock of domestic arrears could be revised down substantially after the new independent audit of arrears incurred during 2017–18, which could mitigate materially the impact of contingent liability shocks.

### Public debt: recent evolution and composition
- Public external debt tripled to around US$ 6.9 billion or 61.3 percent of GDP as of end-2018.
- A large share of external debt is owed to China (21.4 percent of GDP) and oil traders (16.4 percent of GDP), with repayment tied to oil shipments.
- External payment arrears:
  - CFAF 453 billion (US$817 million) at end-2017
  - CFAF 520 billion (US$902 million) at end-2018
- Pre-HIPC arrears:
  - Reduced from 324 billion (US$584 million) as of end-2017 to about CFAF 283 billion (US$497 million) at end-2018 after cancellations and restructurings.
- Post-HIPC arrears increased from US$234 million at end-2017 to US$411 million at end-2018, largely reflecting new arrears against oil traders.
- Domestic public debt rose from 15 percent of GDP at end-2014 to 37.5 percent of GDP at end-2017.
- Taking into account the first phase of the audit of domestic arrears (covering CFAF 528 billion), the stock of domestic debt is estimated at 26.5 percent of GDP at end-2018.
- Composition of domestic debt (end-2018 estimates):
  - Arrears to contractors in construction and transportation: 8.9 percent of GDP
  - Statutory advances from the regional central bank (BEAC): 8.8 percent of GDP
  - Pension arrears and unpaid social benefits: 3.4 percent of GDP
  - Government debt to commercial banks (bonds and Treasury bills since 2016): 2.5 percent of GDP

### Debt restructuring and program implications
- The April 2019 restructuring deal with China:
  - Envisages repayment of about 1/3 of the stock of debt over 2019–21.
  - Provides a 15-year extension of the maturity of the remaining 2/3 of the debt.
  - Implies an average interest rate of about 1¾ percent on the restructured portion.
  - Combined with the February 2018 agreement, provides a total debt relief of about $370 million over the program period (2019–22).
  - Secures substantial debt relief immediately after the program (2023–28), reducing annual debt service by half, and generating a low and predictable stream of payments over the 2029–45 period (below 0.5 percent of GDP per year).
- Authorities are pursuing “good faith” negotiations with oil traders and are committed to completing the restructuring of external commercial debt and domestic debt by the time of the first program review.

### Weaknesses in public debt management and claims reporting
- Noted weaknesses include:
  - Insufficiently transparent debt management (lack of debt strategy to guide debt mobilization).
  - Lack of a formal Treasury management framework.
  - Non-compliance with several CEMAC debt management guidelines (e.g., debt management strategy not annexed to the finance law; loan agreements not ratified by the National Committee for Public Debt).
  - The National Committee for Public Debt, created in 2008, had never been operational until recently; it was reactivated and adopted a manual of debt procedures (structural benchmark) during its first meeting on May 28, 2019.

### Key quantitative vulnerabilities and adjustments used in stress tests (from Text Table 1 and related text)
- Standard/additional shocks and coverages applied in contingent liability stress testing (percent of GDP where stated):
  - Non-guaranteed SOE debt: 10 percent of GDP (assumed half potentially transferred to central government)
  - Rejected domestic arrears: about 6.4 percent of GDP
  - Litigated debt (Commisimpex): 7.5 percent of GDP (additional claim not in baseline debt stock)
  - Default shock for government-guaranteed SOE debt (default setting notes): 2 percent of GDP (trigger rules described)
  - Financial market shock (default minimum): 5 percent of GDP
  - Total of selected items (2+3+4+5) reported as 25.5 percent of GDP in Text Table 1

### Macroeconomic outlook and baseline assumptions relevant to the DSA and stress testing
- Fiscal adjustment:
  - Consistent with the 2019 budget, an adjustment to the non-oil primary fiscal balance of about 10 percent of non-oil GDP is assumed over 2019–23.
- Financing and grant element assumptions:
  - Baseline assumes Congo continues to obtain external financing on concessional terms, but with smaller concessionality in the first part of the projection period because a portion of program financing is semi-concessional.
  - Grant element averages at 43 percent over 2024–28 (assuming bulk of new financing is concessional); after 2028 assumed to fall to about 25 percent over 2028–39.
- Box 1 — main macroeconomic assumptions (selected exact figures):
  - Non-oil sector growth: projected to improve from -5.5 percent in 2018 to 4.1 percent in 2023; beyond 2023 non-oil growth projected to average 4.4 percent.
  - Oil production and prices:
    - Annual oil production projected to peak at about 140 million barrels in 2019–20.
    - Production projected to decline to about 53 million barrels in 2039 in absence of new discoveries.
    - International oil prices projected to recover to about $79 per barrel by 2039.
  - Inflation: annual average inflation expected to increase from 1.2 percent in 2018 to 3 percent in 2024 and remain close to 3 percent over the long term.
  - Current account balance:
    - Projected to remain in surplus over 2019–21, then turn to an average deficit of about 1.5 percent over 2022–24.
    - Projected to reach an average deficit of 11 percent over 2025–39.
  - Primary balance: projected to remain in surplus from 2019 onwards under the baseline.

*REPUBLIC OF CONGO — INTERNATIONAL MONETARY FUND*

### 8.      The newly-introduced composite index (CI) based on the April 2019 World Economic

### 8.      The newly-introduced composite index (CI) based on the April 2019 World Economic

### Composite indicator (CI) and debt-carrying capacity
- The April 2019 World Economic Outlook (WEO) data indicate weak debt carrying capacity for Congo.
- The new methodology uses a composite indicator (CI) combining the CPIA score, external conditions (world economic growth), and country-specific factors, replacing the previous reliance solely on the CPIA rating.
- The CI cutoff for medium debt carrying capacity is 2.69.
- CI Score and components (as presented):
  - ComponentsCoefficients (A) 10-year average values (B) CI Score components (A*B) = (C) Contribution of components
  - CPIA 0.3852.8401.0944%
  - Real growth rate (in percent) 2.7191.4390.042%
  - Import coverage of reserves (in percent) 4.05232.2071.3152%
  - Import coverage of reserves^2 (in percent) -3.99010.373-0.41-17%
  - Remittances (in percent) 2.0220.0000.000%
  - World economic growth (in percent) 13.5203.5590.4819%
  - CI Score 2.51100%
  - CI rating Weak
- Text summary: Weak debt carrying capacity reflects mainly a low CPIA and a low level of foreign reserves.

### External Debt Sustainability — baseline and stress-test outcomes
- Under the baseline:
  - Protracted breaches of the PV of debt-to-GDP ratio and the debt service-to-revenue ratio vis-à-vis Congo’s indicative thresholds (Figure 1).
  - Present value of debt-to-GDP is projected to remain above the PV of debt-to-GDP threshold of 30 percent.
  - Gross debt service-to-revenue ratio is above the indicative threshold of 14 percent in the medium term.
  - Relative to a DSA not incorporating the April 2019 restructuring deal with China, the deal reduced the debt service-to-revenue ratio to levels below its threshold one year earlier (in 2023 instead of 2024) and maintained it below the threshold with a reasonable margin after 2023.
  - Marginal breaches of the debt service-to-exports indicator over 2019-20; the evolution of the debt service-to-exports ratio improved following the restructuring deal.
  - Commercial debt restructuring will still be needed to bring debt to sustainable levels by 2023, in line with the program.
  - The market financing risk module indicates a moderate risk of heightened liquidity pressures.
- Stress tests:
  - All indicators of external public debt breach their indicative thresholds by substantial margins in stress test scenarios.
  - Standard bound tests produce sharp increases in debt burden indicators under country-specific volatility.
  - The exports shock stress test is the most extreme for all indicators due to high dependence on oil exports.
  - A decline in exports to a level equivalent to one standard deviation below their historical average in the second and third years of the projection period would cause the PV of debt-to-exports ratio to rise above 310 percent at its peak.
  - The decline in exports also causes a significant increase in the debt service-to-exports ratio beyond its threshold.
  - Given the small size of the outstanding Eurobond (less than 3 percent of GDP), market-financing risks are low (Figure 5).
- Classification:
  - Reflecting the build-up of considerable new external arrears and protracted breaches of thresholds for the PV of the debt-to-GDP and debt service-to-revenue ratios under the baseline, the Republic of Congo is classified “in debt distress”.
  - Breaches occur at the very beginning of the projection horizon and remain over the medium term despite assumed strong fiscal adjustment.

### Comparative baseline outcomes (selected indicators)
- Text Table 6. Comparison of PPG Gross External Debt Indicators, Baseline Scenario (as presented)
  - 2019DSA51.648.446.236.222.7
  - 2015DSA26.226.525.826.226.4
  - 2019DSA62.259.658.761.060.4
  - 2015DSA35.236.8
  - 37.643.9
  - 53.3
  - 2019DSA13.912.59.36.65.4
  - 2015DSA4.84.44.63.03.8
  - 2019DSA37.432.022.810.75.1
  - 2015DSA9.38.58.75.06.3
- Indicators referenced:
  - PV of Debt-to-GDP Ratio
  - PV of Debt-to-Exports Ratio
  - Debt Service-to-Revenue Ratio
  - Debt Service-to-Exports Ratio

### Public debt sustainability and vulnerabilities
- Under the baseline:
  - PV of public and publicly guaranteed debt-to-GDP (including domestic arrears and direct financing from the BEAC) is significantly above the 35 percent benchmark associated with heightened public debt vulnerabilities with a weak debt carrying capacity.
  - The 35 percent benchmark is breached from 2018 until 2030 under the baseline scenario.
- Stress-tests:
  - The primary balance shock stress test is the most extreme for two indicators based on the PV of public debt, underscoring the need for strong fiscal adjustment over the medium term.
  - The newly introduced commodity price shock is the most extreme for the debt service-to-revenue ratio, consistent with Congo’s dependence on oil receipts.
  - Accumulation of new domestic arrears indicates that the risk of debt distress has materialized.

### Conclusions and key policy recommendations
- Conclusion:
  - Accumulation of arrears and breaches of external debt and debt service thresholds under the baseline and in all stress tests lead to classification of Congo’s external debt as “in debt distress”.
  - The accumulation of domestic arrears also confirms the overall rating as being “in debt distress”.
  - This represents a rapid deterioration from low risk in the 2014 DSA and moderate risk in the 2015 DSA.
  - Deterioration reflects the continued impact of the oil shock, absence of sufficient fiscal adjustment until 2017, and an excessive and non-transparent borrowing policy.
- Fiscal and borrowing policy recommendations:
  - Anchor macroeconomic policies by a stability oriented medium-term fiscal framework that targets substantial primary surpluses and a reduction in the non-oil primary fiscal deficit.
  - Adopt a cautious policy for new borrowing to avoid further deterioration of debt indicators.
  - Do not contract new non-concessional loans before the sustainability of public finances has been unequivocally restored, or while Congo is still in debt distress or at high risk of debt distress.
- Structural and competitiveness recommendations:
  - Over the medium term, improve competitiveness and promote economic diversification to increase resilience to exogenous shocks.
  - Broaden the economic base by enhancing development of the non-oil sector to reduce export volatility and strengthen debt service capacity.
  - Improve the business climate (with assistance from the World Bank) to strengthen competitiveness and boost growth.
  - Prioritize making electricity supply more reliable and competitive, enhancing the quality of transportation, and expanding vocational training to increase labor productivity.

### Strengthening public debt and asset management (institutional recommendations)
- Capacity development needs:
  - Strengthen legal and institutional framework to cover the entire process of issuing and managing debt by re-dynamizing the National Committee for Public Debt (NCPD) and clarifying its attributions.
  - Develop a medium-term debt management strategy and enhance transparency in debt management.
  - Introduce a formal framework for managing the government's cash flows.
  - Strengthen staff analytical capabilities in managing public debt.
- Debt recording and monitoring:
  - Strengthen debt recording and monitoring capacity and better track all potential government liabilities, including major SOEs, contingent liabilities, and publicly guaranteed debt not currently covered in official debt statistics and the DSA.
  - Move forward with developing a debt management strategy, append it to the budget law, and strengthen the government's cash flow management (recommendations aligned with MCM TA missions).

*Source: IMF staff calculations.*

### 17.      The authorities concurred with staff’s assessment that Congo is in debt distress and its

### 1cogea2019001 - 17.      The authorities concurred with staff’s assessment that Congo is in debt distress and its

### Authorities' assessment and policy response
- The authorities concurred with staff’s assessment that Congo is in debt distress and its debt is unsustainable.
- Authorities acknowledged the importance of enhanced debt management and the need to monitor debt developments more closely.
- Ongoing policy responses:
  - Pursue strategy to restructure Congo’s public debt.
  - Implement technical assistance recommendations to improve debt management.
  - Continue fiscal consolidation efforts.

### External Debt Sustainability — baseline projections (Table 1 highlights)
- External debt (nominal), percent of GDP:
  - 2016: 91.4
  - 2017: 80.0
  - 2018: 61.3
  - 2019: 58.1
  - 2020: 56.6
  - 2021: 55.5
  - 2022: 54.2
  - 2023: 51.5
  - 2024: 49.7
  - 2029: 38.6
  - 2039: 20.2
  - (of which: public and publicly guaranteed (PPG) mirrors above series)
- Change in external debt (percent of GDP):
  - 2016: 9.3
  - 2017: -11.4
  - 2018: -18.7
  - 2019: -3.2
  - 2020: -1.4
  - 2021: -1.2
  - 2022: -1.3
  - 2023: -2.6
  - 2024: -1.9
  - 2029: -2.3
  - 2039: -1.4
- Identified net debt-creating flows (percent of GDP):
  - 2016: 34.0
  - 2017: -9.5
  - 2018: -28.4
  - 2019: -13.0
  - 2020: -10.2
  - 2021: -6.8
  - 2022: -3.3
  - 2023: -3.7
  - 2024: -3.9
  - 2029: 5.0
  - 2039: 10.0
- Non-interest current account deficit (percent of GDP):
  - 2016: 61.1
  - 2017: 4.3
  - 2018: -8.6
  - 2019: -7.0
  - 2020: -6.4
  - 2021: -2.8
  - 2022: 0.3
  - 2023: 1.0
  - 2024: 0.7
  - 2029: 9.3
  - 2039: 16.0
- Exports (percent of GDP):
  - 2016: 59.1
  - 2017: 73.3
  - 2018: 83.3
  - 2019: 83.0
  - 2020: 81.2
  - 2021: 78.8
  - 2022: 75.3
  - 2023: 73.2
  - 2024: 70.7
  - 2029: 51.9
  - 2039: 30.9
- Imports (percent of GDP):
  - 2016: 110.9
  - 2017: 66.4
  - 2018: 61.1
  - 2019: 62.7
  - 2020: 62.4
  - 2021: 63.2
  - 2022: 63.8
  - 2023: 62.8
  - 2024: 60.1
  - 2029: 52.1
  - 2039: 40.3
- Net FDI (negative = inflow), percent of GDP:
  - 2016: -37.6
  - 2017: -3.7
  - 2018: -2.9
  - 2019: -4.1
  - 2020: -4.2
  - 2021: -4.1
  - 2022: -4.7
  - 2023: -4.9
  - 2024: -4.3
  - 2029: -3.8
  - 2039: -5.6
- Endogenous debt dynamics (percent of GDP):
  - 2016: 10.5
  - 2017: -10.1
  - 2018: -16.8
  - 2019: -1.9
  - 2020: 0.4
  - 2021: 0.1
  - 2022: 1.0
  - 2023: 0.1
  - 2024: -0.4
  - 2029: -0.5
  - 2039: -0.4
- PV of PPG external debt-to-GDP ratio (selected values):
  - 2019: 54.2
  - 2020: 51.6
  - 2021: 48.4
  - 2022: 46.2
  - 2023: 44.5
  - 2024: 42.3
  - 2029: 32.1
  - 2039: 17.9
- PV of PPG external debt-to-exports ratio (selected values):
  - 2019: 65.0
  - 2020: 62.2
  - 2021: 59.6
  - 2022: 58.7
  - 2023: 59.1
  - 2024: 57.8
  - 2029: 58.0
  - 2039: 61.9
- PPG debt service-to-exports ratio (selected values):
  - 2019: 13.1
  - 2020: 8.9
  - 2021: 8.6
  - 2022: 13.9
  - 2023: 12.5
  - 2024: 9.3
  - 2029: 6.5
  - 2039: 5.9
- PPG debt service-to-revenue ratio (selected values):
  - 2019: 23.4
  - 2020: 24.0
  - 2021: 24.6
  - 2022: 37.4
  - 2023: 32.0
  - 2024: 22.8
  - 2029: 12.5
  - 2039: 7.6
- Gross external financing need (Million of U.S. dollars):
  - 2016: 2,433.1
  - 2017: 637.2
  - 2018: -508.3
  - 2019: 57.3
  - 2020: -46.1
  - 2021: 52.0
  - 2022: 234.0
  - 2023: 47.5
  - 2024: -105.8
  - 2029: 1,182.0
  - 2039: 2,728.5

### Key macroeconomic assumptions (Table 1)
- Real GDP growth (percent):
  - 2016: -2.8
  - 2017: -1.8
  - 2018: 1.6
  - 2019: 5.4
  - 2020: 1.6
  - 2021: 1.9
  - 2022: 0.1
  - 2023: 1.3
  - 2024: 2.3
  - 2029: 2.4
  - 2039: 3.3
- GDP deflator in US dollar terms (change in percent):
  - 2016: -6.3
  - 2017: 16.8
  - 2018: 28.5
  - 2019: -7.4
  - 2020: 0.3
  - 2021: -0.8
  - 2022: -2.1
  - 2023: -0.7
  - 2024: 0.9
  - 2029: 0.4
  - 2039: 2.4
- Effective interest rate (percent) (current-year interest payments divided by previous period debt stock):
  - 2016: 2.6
  - 2017: 2.0
  - 2018: 3.1
  - 2019: 2.3
  - 2020: 2.2
  - 2021: 2.0
  - 2022: 1.8
  - 2023: 1.5
  - 2024: 1.4
  - 2029: 1.2
  - 2039: 1.2
- Growth of exports of G&S (US dollar terms, percent) (selected):
  - 2016: -9.5
  - 2017: 42.3
  - 2018: 48.5
  - 2019: -2.7
  - 2020: -0.4
  - 2021: -2.0
  - 2022: -6.5
  - 2023: -2.3
  - 2024: -0.3
  - 2029: -4.3
  - 2039: 0.7
- Government revenues (excluding grants, percent of GDP):
  - 2016: 33.2
  - 2017: 27.3
  - 2018: 29.1
  - 2019: 30.9
  - 2020: 31.7
  - 2021: 32.3
  - 2022: 32.7
  - 2023: 34.2
  - 2024: 34.7
  - 2029: 38.0
  - 2039: 41.4
- Aid flows (Million of US dollars):
  - 2016: 247.6
  - 2017: 205.1
  - 2018: 312.9
  - 2019: 318.3
  - 2020: 321.5
  - 2021: 306.8
  - 2022: 201.5
  - 2023: 209.0
  - 2024: 216.5
  - 2029: 92.9
  - 2039: 178.6
- Nominal GDP (Million of US dollars):
  - 2016: 7,787
  - 2017: 8,932
  - 2018: 11,664
  - 2019: 11,382
  - 2020: 11,592
  - 2021: 11,715
  - 2022: 11,472
  - 2023: 11,532
  - 2024: 11,902
  - 2029: 13,269
  - 2039: 22,292

### Public Sector Debt — baseline projections (Table 2 highlights)
- Public sector debt (percent of GDP):
  - 2016: 118.6
  - 2017: 117.5
  - 2018: 87.8
  - 2019: 81.7
  - 2020: 76.6
  - 2021: 71.6
  - 2022: 66.8
  - 2023: 60.7
  - 2024: 57.3
  - 2029: 41.4
  - 2039: 20.6
  - (of which external debt series mirrors Table 1)
- Change in public sector debt (percent of GDP):
  - 2016: 15.6
  - 2017: -1.1
  - 2018: -29.7
  - 2019: -6.2
  - 2020: -5.1
  - 2021: -5.0
  - 2022: -4.8
  - 2023: -6.1
  - 2024: -3.4
  - 2029: -3.3
  - 2039: -1.5
- Identified debt-creating flows (percent of GDP) (selected):
  - 2016: 34.3
  - 2017: -13.9
  - 2018: -27.3
  - 2019: -9.1
  - 2020: -8.8
  - 2021: -8.6
  - 2022: -6.1
  - 2023: -7.6
  - 2024: -8.9
  - 2029: -5.0
  - 2039: -2.7
- Primary deficit (percent of GDP):
  - 2016: 17.8
  - 2017: 5.2
  - 2018: -8.9
  - 2019: -9.3
  - 2020: -9.2
  - 2021: -9.0
  - 2022: -9.1
  - 2023: -8.3
  - 2024: -8.0
  - 2029: -4.5
  - 2039: -2.1
- Revenue and grants (percent of GDP):
  - 2016: 34.1
  - 2017: 27.9
  - 2018: 29.2
  - 2019: 30.9
  - 2020: 31.7
  - 2021: 32.1
  - 2022: 32.7
  - 2023: 34.2
  - 2024: 34.7
  - 2029: 38.7
  - 2039: 42.2
- PV of public debt-to-GDP ratio (selected values):
  - 2019: 82.8
  - 2020: 74.9
  - 2021: 68.2
  - 2022: 62.2
  - 2023: 57.1
  - 2024: 51.4
  - 2029: 48.6
  - 2039: 34.8
- Debt service-to-revenue and grants ratio (percent):
  - 2019: 28.6
  - 2020: 26.4
  - 2021: 30.5
  - 2022: 48.6
  - 2023: 46.4
  - 2024: 38.8
  - 2029: 16.4
  - 2039: 8.7
- Gross financing need (percent of GDP):
  - 2019: 28.5
  - 2020: 13.4
  - 2021: 0.0
  - 2022: 5.8
  - 2023: 5.5
  - 2024: 3.4
  - 2029: 1.3
  - 2039: -2.2

### Stress tests, sensitivity analysis and realism diagnostics
- Figure and table summaries indicate multiple stress tests and sensitivity exercises for 2019–29, including:
  - Alternative scenarios (e.g., key variables at historical averages).
  - Bound tests: B1 Real GDP growth; B2 Primary balance; B3 Exports; B4 Other flows; B5 Depreciation; B6 Combination of B1–B5.
  - Tailored tests: C1 Combined contingent liabilities; C2 Natural disaster (n.a. where not applicable); C3 Commodity price; C4 Market financing.
- Selected sensitivity results (Table 3 excerpts, percent):
  - PV of debt-to-GDP ratio baseline 2019–2029 (selected): 52 48 46 45 42 41 40 38 36 34 32
  - Debt service-to-exports ratio baseline (2019–2029, selected): 62 60 59 59 58 59 59 60 61 61 62
  - PV of debt-to-exports ratio baseline (2019–2029, selected): 14 12 98 64 46 67 67
  - Debt service-to-revenue ratio baseline (2019–2029, selected): 37 32 23 19 13 8 9 10 11 10 9
- Table 4 (public debt sensitivity) highlights breaches of public debt benchmark under adverse scenarios (bold indicates breach). Example baseline PV of Debt-to-GDP Ratio (2019–2029) series:
  - 2019: 74
  - 2020: 67
  - 2021: 61
  - 2022: 56
  - 2023: 50
  - 2024: 47
  - 2029: 33
- Figures on drivers of debt dynamics decompose changes into: residual, price and exchange rate, real GDP growth, nominal interest rate, current account + FDI, and change in PPG debt.
- Realism tools (Figure 4) present:
  - 3-Year Adjustment in Primary Balance (percentage points of GDP) distribution and Congo’s projected adjustment.
  - Fiscal adjustment and possible growth path.
  - Public and private investment rates (percent of GDP).
  - Contribution to Real GDP growth (percent, 5-year average).

### Key risks and transmission channels reflected
- Commodity price shocks are a prominent stress driver (commodity price shock magnitudes based on IMF research department outlook).
- Market financing and combined contingent liabilities can produce significant deteriorations in public and external debt indicators.
- Exchange rate depreciation and weak real GDP growth are significant contributors to past and projected debt dynamics.

*Sources: Country authorities; and staff estimates and projections.*

### 2.5 percentage points of GDP in

### 2.5 percentage points of GDP in

### Overview and recent developments
- Statement by Mr. Mohamed-Lemine Raghani, Executive Director for the Republic of Congo and Mr. Mohamed Sidi Bouna, Senior Advisor to the Executive Director — July 11, 2019.
- The sharp decline in international oil prices during 2014–16 led to a deep economic recession in Congo, large fiscal revenue losses, rapid public debt accumulation, difficulties in servicing debt, and an accumulation of arrears.
- Policy adjustments enacted since the crisis have begun to stabilize the economy; growth picked up in 2018, reaching 1.6 percent.
- The current account balance turned positive in 2018, helped by an increase in oil production, recovery in international oil prices, and lower imports.
- Imputed foreign exchange reserves at the BEAC stabilized but remain low.
- The overall fiscal balance in 2018 is in surplus due to increases in oil and non-oil revenues and drastic spending reductions.
- Inflation slowed at end-2018 due to relatively weak domestic demand.

### Key statistics and fiscal indicators
- Public investment: 77.5 percent of non-oil GDP in 2014; cut to 5.5 percent of non-oil GDP in 2018.
- Public debt: 118.6 percent of GDP in 2016; decreased to 87.8 percent of GDP in 2018.
  - Of 2018 public debt: 61.3 percent is external and 26.5 percent is domestic.
- Growth:
  - 2018 overall growth: 1.6 percent.
  - Non-oil sector growth projected to rise gradually up to 4 percent in 2022.
- Non-oil primary fiscal deficit (NOPD) target: reduce to 17 percent of non-oil GDP by 2022 (from 28 percent in 2018).

### Program objectives and pillars under the ECF-supported program
- The authorities request IMF support under an Extended Credit Facility (ECF) arrangement.
- The reform program is centered on five key pillars:
  - Fiscal adjustment to achieve debt sustainability.
  - Strengthening of governance.
  - Protection of vulnerable groups.
  - Preservation of the soundness of the financial sector.
  - Implementation of structural reforms to improve the business climate and diversify the economy.
- The program is supported by regional monetary and financial sector policies through policy assurances from BEAC and COBAC.

### Fiscal policy measures and debt strategy
- Primary fiscal objective: significantly reduce the NOPD to 17 percent of non-oil GDP by 2022.
- Revenue measures:
  - Review tax exemptions and reassess exemptions in the investment code.
  - Prohibit discretionary granting of exemptions.
  - Approve by end-October 2019 a revised price structure for petroleum products that includes higher taxes and an automatic indexation mechanism to raise fiscal revenues.
- Expenditure measures:
  - Cap transfers to state-owned oil refinery CORAF; subsidies conditional on CORAF reducing operating expenditures under a new performance contract.
  - Subsidies to the electric power company, CEC, conditional on quarterly assessments by the Ministry of Finance.
  - Adopt an action plan to gradually reduce the wage bill as a share of non-oil GDP; retiring public sector employees will not be systematically replaced except in social sectors.
  - Limit capital spending through improved prioritization and enhanced effectiveness of public investment projects.
- Debt restructuring and borrowing:
  - Agreement reached with China on restructuring of Congo’s external debt.
  - Authorities committed to seek external financing only on concessional terms during the program.
  - Approve by end-October 2019 a domestic debt restructuring strategy following an audit by an international accounting firm.
  - Pursue negotiations with commercial creditors in good faith, aiming to finalize an agreement before the first ECF review.
  - Objective: bring public debt below the regional ceiling of 70 percent of GDP by 2022.

### Financial sector policy
- Banking system affected by the crisis but overall solvency remains sound; none of the banks in difficulty pose a systemic risk.
- Authorities will work closely with COBAC to strengthen financial system stability and address AML/CFT compliance weaknesses identified by the Task Force on Money Laundering in Central Africa in 2015.
- For two banks in difficulty:
  - Adopt a resolution plan for the bank that has become insolvent.
  - Sell the second bank to private investors.

### Governance, transparency, and anticorruption measures
- June 2018: IMF-assisted diagnostic report published analyzing the impact of weak governance and corruption, particularly in the oil sector.
- Parliamentary actions:
  - Amendments to SNPC law requiring the state-owned oil company to publish its audited financial statements annually.
  - New law requiring that all oil production sharing agreements be made public.
  - Established an anti-corruption commission with investigative powers.
  - Mandatory asset declarations for senior political officials.
- Transparency Committee on the Management of Natural Resources and Public Spending (under Congo’s Transparency Law) to include at least one-third of members from civil society.

### Social protection and poverty reduction
- Social sectors prioritized and preserved: health, basic education, promotion of women, infrastructure to open isolated areas.
- Cash transfer social safety net program in place with World Bank and French Agency for Development support; conditional on greater access to health and education services and monitored against health and education benchmarks.
- Plans to expand the cash transfer program in 2019 to add additional poor households and increase amounts provided to households.

### Structural reforms and economic diversification
- Ongoing reform agenda to improve the business climate with development partner support.
- Focus areas include:
  - Creating a national real estate registry.
  - Simplifying procedures and reducing costs to start a business.
- Interministerial Committee on Business Climate established, including development partners.
- Action plan to diversify the economy (assisted by World Bank and AfDB) emphasizing:
  - Development of agriculture, food, and lumber industries.
  - Improving supply and access to electricity, particularly in remote areas.
- Adopt by October 2019 a privatization strategy; AfDB-supported study to identify public enterprises and assets for sale.

### Implementation status and commitments
- All prior actions to program approval have been implemented; most actions aim to increase transparency and improve governance.
- Authorities have submitted required reports to parliament, including on SNPC pre-financing contracts, special infrastructure contracts against in-kind payments, and a list of projects by the Ministry of Public Works (2014–2017).
- Authorities reiterate firm commitment to sound policies and reforms under the ECF-supported program and seek Executive Directors’ approval of the arrangement.

*Statement by Mr. Mohamed-Lemine Raghani and Mr. Mohamed Sidi Bouna — July 11, 2019.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1cogea2019001.pdf_